CBA Risk Management in Banking 2 — Questions and Answers
Question 1: Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio required for banks?
- 4.5% (Correct answer)
- 6.0%
- 8.0%
- 10.5%
Correct answer: 4.5%
Basel III requires banks to hold a minimum CET1 ratio of 4.5% of risk-weighted assets.
Question 2: Which risk management technique involves assigning probability distributions to uncertain variables to assess the range of possible outcomes?
- Stress testing
- Monte Carlo simulation (Correct answer)
- Gap analysis
- Scenario analysis
Correct answer: Monte Carlo simulation
Monte Carlo simulation uses random sampling across probability distributions to model the range of possible financial outcomes.
Question 3: A bank's net interest margin (NIM) declines when interest rates rise unexpectedly. This is an example of which risk?
- Liquidity risk
- Credit risk
- Interest rate risk in the banking book (IRRBB) (Correct answer)
- Operational risk
Correct answer: Interest rate risk in the banking book (IRRBB)
IRRBB captures the adverse impact of interest rate movements on a bank's net interest income and economic value.
Question 4: The risk that a bank cannot meet its payment obligations as they fall due without incurring unacceptable losses is called:
- Solvency risk
- Funding liquidity risk (Correct answer)
- Market liquidity risk
- Counterparty risk
Correct answer: Funding liquidity risk
Funding liquidity risk is the inability to raise funds to meet obligations on time without unacceptable cost.
Question 5: Which of the following best describes the 'repricing risk' component of interest rate risk?
- Risk from changes in the shape of the yield curve
- Risk from timing differences in asset and liability maturity or repricing (Correct answer)
- Risk from embedded optionality in bank products
- Risk from basis differences between reference rates
Correct answer: Risk from timing differences in asset and liability maturity or repricing
Repricing risk arises from timing mismatches between when assets and liabilities reprice or mature.
Question 6: A bank auditor reviewing credit concentration risk should MOST likely focus on:
- Foreign exchange hedging positions
- Large exposures to single borrowers or correlated sectors (Correct answer)
- Trading book mark-to-market losses
- Intraday liquidity positions
Correct answer: Large exposures to single borrowers or correlated sectors
Credit concentration risk is the exposure to large individual borrowers or highly correlated borrower groups that can cause significant loss.
Question 7: Under the standardized approach for operational risk capital (Basel III), the Business Indicator Component (BIC) is multiplied by which factor?
- Loss Multiplier
- Internal Loss Modifier (ILM) (Correct answer)
- Marginal Coefficient
- Scaling Factor
Correct answer: Internal Loss Modifier (ILM)
Under Basel III's Standardized Approach, the BIC is multiplied by the Internal Loss Modifier to determine operational risk capital requirements.
CBA Risk Management in Banking 2
Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio required for banks?