Mixed Deck — All CRA Topics Flashcards

Which of the following best describes 'Pillar 2 capital add-ons' in the Basel framework?

Answer: Supervisory-imposed capital above Pillar 1 minimums based on individual bank risk assessments

Pillar 2 add-ons are supervisory authority-imposed requirements reflecting bank-specific risks not fully captured by Pillar 1's standardized charges.

A risk analyst maps risks along their entire value chain from raw materials to end customer. This approach is called:

Answer: Value chain risk analysis

Value chain risk analysis identifies risks at each stage of the production and delivery process, exposing interdependencies and single points of failure.

Which component of regulatory capital absorbs losses only in liquidation and does NOT protect depositors on a going-concern basis?

Answer: Tier 2 capital

Tier 2 capital (e.g., subordinated debt) absorbs losses only in a gone-concern (winding-up) scenario, unlike CET1 and AT1 which absorb losses on a going-concern basis.

A retail bank's ERM program identifies concentration risk in commercial real estate loans. Under COSO ERM, which risk response category involves selling a portion of the loan portfolio to a third party?

Answer: Share

Sharing transfers a portion of the risk (and potential loss) to another party, such as through loan sales or syndications.

Why is documentation critical in compliance?

Answer: To support audits and demonstrate compliance

Comprehensive documentation is essential in compliance as it provides verifiable evidence that an organization has met its legal and regulatory obligations. This documentation is critical for internal and external audits, demonstrating due diligence and accountability, and can be crucial in legal proceedings.

Which of the following assets is NOT typically eligible as a High-Quality Liquid Asset (HQLA) under Basel III?

Answer: Investment-grade corporate bonds rated below AA-

Only corporate bonds rated AA- or higher qualify as Level 2B HQLA; bonds rated below AA- do not meet the eligibility threshold.

A multinational corporation's foreign subsidiary is nationalized by the host government without fair compensation. This is an example of:

Answer: Expropriation risk

Expropriation risk refers to the danger that a host government will seize foreign-owned assets, either with inadequate compensation (expropriation) or none at all (confiscation).

Which component of the Basel III framework specifically addresses the risk of excessive bank leverage during periods of growth?

Answer: Leverage Ratio

The Basel III Leverage Ratio (minimum 3%) acts as a backstop to risk-based capital measures, limiting excessive balance sheet leverage.

When applying the precautionary principle in risk decision-making, an organization should:

Answer: Take preventive action even when full causal evidence is lacking, if consequences could be severe

The precautionary principle mandates protective action under uncertainty when potential harm is serious or irreversible, even without conclusive scientific proof.

A company's audit committee is best described as a committee of the:

Answer: Board of directors

The audit committee is a subcommittee of the board of directors responsible for overseeing financial reporting and the external audit process.

Which governance mechanism ensures that the risk function maintains independence from business line pressures?

Answer: The Chief Risk Officer (CRO) having a direct reporting line to the board or CEO

Independence of the risk function is preserved when the CRO reports directly to the board or CEO, preventing business units from overriding or suppressing unfavorable risk assessments.

Asset-liability mismatch risk arises primarily when:

Answer: Short-term liabilities are used to fund long-term assets, creating a structural refinancing gap

Asset-liability mismatch occurs when liabilities mature before the assets they fund, exposing the bank to rollover and refinancing risk.

Which approach to risk identification works backward from a potential undesired outcome to identify all contributing causes?

Answer: Fault Tree Analysis (FTA)

Fault Tree Analysis starts with a top-level undesired event and uses Boolean logic to trace all possible contributing fault combinations backward to root causes.

Why might a risk practitioner use logarithmic scales on a risk heat map instead of linear scales?

Answer: To better represent extreme tail risks where impact differences are orders of magnitude apart

Logarithmic scales compress large ranges, making it easier to visually distinguish between risks whose impacts differ by orders of magnitude (e.g., $1M vs $1B).

Stakeholder mapping in risk communication helps risk managers to:

Answer: Identify each stakeholder's interest, influence, and information needs to tailor risk messages appropriately

Stakeholder mapping allows risk managers to customize the depth, format, and frequency of risk communications based on each stakeholder's role and decision-making authority.

In liquidity risk management, a bank's survival horizon represents:

Answer: The length of time the bank can sustain operations using its liquidity buffer without external market access

The survival horizon measures how long a bank can continue operating in a stress scenario relying solely on its existing liquidity reserves without new funding.

What is the primary purpose of the Net Stable Funding Ratio (NSFR)?

Answer: Promote resilient longer-term funding structures over a one-year horizon

The NSFR requires banks to maintain stable funding relative to illiquid assets over a one-year time horizon.

A heat map that displays both inherent and residual risk positions for each risk is sometimes called a what?

Answer: Control effectiveness map or dual-position heat map

A dual-position or control effectiveness heat map plots each risk twice—once at its inherent position and once at its residual position—visually demonstrating the value added by controls.

The concept of 'friend-shoring' in supply chain risk management involves:

Answer: Concentrating supply chains among geopolitically aligned partner nations

Friend-shoring is a strategy of concentrating trade and supply chain relationships among politically allied countries to reduce exposure to adversarial geopolitical relationships.

Who is typically responsible for ensuring compliance within an organization?

Answer: Compliance Officer

A Compliance Officer is a dedicated professional within an organization responsible for overseeing and managing compliance with internal policies and external regulations. They develop, implement, and monitor compliance programs to ensure the company operates legally and ethically.