Risk Management Flashcards
7 cards from real Banking practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Management flashcards as text
A bank's chief risk officer (CRO) reports a Key Risk Indicator (KRI) that has breached its threshold. What is the primary purpose of a KRI in risk management?
Answer: To provide early warning signals of increasing risk exposure
KRIs are forward-looking metrics designed to signal rising risk levels before they materialize into actual losses.
Under the Dodd-Frank Act, systemically important financial institutions (SIFIs) are required to prepare which document to demonstrate they can be wound down without taxpayer bailout?
Answer: Living Will (Resolution Plan)
SIFIs must file Living Wills—formal resolution plans showing regulators how the firm could be safely wound down during severe financial distress.
A bank issues a loan at a fixed rate funded by variable-rate deposits. If interest rates rise, the bank's net interest income will most likely:
Answer: Decrease, because funding costs rise while loan income stays fixed
When a fixed-rate loan is funded by variable-rate deposits, rising rates increase funding costs without a corresponding increase in loan income, compressing NIM.
The 'unexpected loss' component in credit risk modeling is important because:
Answer: It represents the deviation from average losses that capital must absorb
Unexpected loss is the volatility around average (expected) losses, and banks must hold regulatory capital precisely to absorb these tail outcomes.
Which of the following is an example of reputational risk in banking?
Answer: Negative media coverage following an anti-money-laundering compliance failure
Reputational risk arises when events—such as AML failures publicized in the media—damage customer trust and the institution's public image.
What does the term 'risk-weighted assets' (RWA) mean in the context of bank capital requirements?
Answer: Bank assets multiplied by risk weights reflecting each asset's credit risk
RWA is calculated by multiplying each asset by a regulatory risk weight (e.g., 0% for government bonds, 100% for corporate loans) to reflect credit risk in capital ratios.
A bank uses a Monte Carlo simulation to estimate potential trading losses over the next 10 days. This tool is most closely associated with measuring which type of risk?
Answer: Market risk
Monte Carlo simulation is commonly used in market risk management to model the distribution of potential portfolio losses by simulating thousands of possible price paths.