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Risk and Basic Risk Management Framework
Define risk in banking context.
Possibility of loss arising from uncertainties in borrower default, rates, FX, liquidity, operations.
How does variability of net cash flow relate to risk?
Higher variability = higher risk; lower variability = lower risk; zero variability = zero risk.
What is the risk-return-capital linkage?
Higher risk requires higher capital buffer and higher expected return; lower risk requires lower capital and return.
Why is ROE/ROI misleading for investment comparison?
ROE/ROI ignore risk taken to earn returns; 20% ROE on junk bonds ≠ 15% ROE on AAA bonds.
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