NAB Risk Management and Insurance 2 — Questions and Answers
Question 1: Which type of risk arises when a borrower fails to meet their contractual debt obligations to a bank?
- Liquidity risk
- Credit risk (Correct answer)
- Market risk
- Operational risk
Correct answer: Credit risk
Credit risk is the risk of financial loss due to a borrower's failure to repay a loan or meet contractual obligations.
Question 2: A bank's risk appetite statement primarily defines:
- The maximum profit target for each business unit
- The types and amounts of risk the bank is willing to accept in pursuit of its strategy (Correct answer)
- The list of risks the bank must legally disclose to regulators
- The insurance coverage limits for operational losses
Correct answer: The types and amounts of risk the bank is willing to accept in pursuit of its strategy
A risk appetite statement articulates the level and types of risk a bank is willing to accept to achieve its strategic objectives.
Question 3: What does a 'stress test' in banking risk management typically assess?
- Employee performance under high workloads
- The bank's resilience under severe but plausible adverse economic scenarios (Correct answer)
- The strength of encryption systems under cyberattack
- The physical durability of banking infrastructure
Correct answer: The bank's resilience under severe but plausible adverse economic scenarios
Stress tests evaluate how a bank's financial position would hold up under hypothetical adverse scenarios such as economic downturns or market shocks.
Question 4: Which insurance product specifically protects a business against losses resulting from employee dishonesty or fraud?
- General liability insurance
- Fidelity bond (crime insurance) (Correct answer)
- Directors and Officers insurance
- Business interruption insurance
Correct answer: Fidelity bond (crime insurance)
A fidelity bond, also called crime insurance, covers losses caused by fraudulent or dishonest acts committed by employees.
Question 5: In the context of insurance, 'subrogation' refers to:
- The process of canceling a policy mid-term
- The insurer's right to pursue a third party that caused an insured loss after paying the claim (Correct answer)
- The adjustment of premium based on claims history
- The transfer of policy ownership to a beneficiary
Correct answer: The insurer's right to pursue a third party that caused an insured loss after paying the claim
Subrogation allows an insurer to recover costs from a responsible third party after compensating the insured for a loss.
Question 6: A bank identifies that a critical IT vendor could go bankrupt. Which risk management strategy is most appropriate?
- Risk acceptance
- Risk avoidance
- Vendor concentration risk mitigation through diversification (Correct answer)
- Transferring the risk via a credit default swap
Correct answer: Vendor concentration risk mitigation through diversification
Diversifying critical IT vendors reduces concentration risk and ensures business continuity if one vendor fails.
Question 7: Under Basel III, what is the primary purpose of the Liquidity Coverage Ratio (LCR)?
- To ensure banks hold enough capital to absorb unexpected credit losses
- To ensure banks maintain sufficient high-quality liquid assets to survive a 30-day stress scenario (Correct answer)
- To limit the total amount of loans a bank can issue
- To measure the bank's return on risk-weighted assets
Correct answer: To ensure banks maintain sufficient high-quality liquid assets to survive a 30-day stress scenario
The LCR requires banks to hold enough high-quality liquid assets (HQLA) to cover net cash outflows over a 30-day stress period.
NAB Risk Management and Insurance 2
Which type of risk arises when a borrower fails to meet their contractual debt obligations to a bank?