Risk Management Flashcards

Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio required for banks?

Answer: 4.5%

Basel III requires banks to hold a minimum CET1 capital ratio of 4.5% of risk-weighted assets.

Which risk metric measures the maximum expected loss over a given time period at a specified confidence level?

Answer: Value at Risk (VaR)

Value at Risk (VaR) estimates the maximum potential loss over a specific time horizon at a given confidence level.

A bank's net interest margin (NIM) compresses when short-term rates rise faster than long-term rates. This is an example of which risk?

Answer: Interest rate risk

Interest rate risk arises when changes in interest rates adversely affect a bank's net interest income or asset values.

What does a bank's Liquidity Coverage Ratio (LCR) measure?

Answer: Adequacy of 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 during a 30-day stress period.

Which internal control framework is most commonly referenced by U.S. banks for assessing risk management and internal controls?

Answer: COSO ERM Framework

The COSO Enterprise Risk Management (ERM) Framework is the dominant standard U.S. banks use to evaluate internal controls and risk governance.

When a loan borrower's credit rating is downgraded but the loan has not defaulted, the bank faces which type of credit risk?

Answer: Migration risk

Migration risk is the risk that a borrower's credit quality deteriorates (rating downgrade) even before an actual default occurs.

A bank grants a large loan to a single corporate borrower representing 30% of its total loan portfolio. This primarily creates which risk?

Answer: Concentration risk

Concentration risk arises when a bank's exposures are heavily weighted toward a single borrower, sector, or geography.