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Risk and basic risk management framework
What is the definition of risk in the context of banking?
Risk is the possibility of loss or adverse outcome arising from uncertainty in future events. In banking, it refers to the probability that actual returns will differ from expected returns due to various internal or external factors.
What is 'risk quantification' and why is it essential in banking risk management?
Measuring risk in numerical terms to enable informed decision-making.
What are the three broad categories of risk faced by banks as per RBI guidelines?
Banks face credit risk, market risk, and operational risk as the three broad categories, often referred to as the Basel II risk pillars. These are supplemented by liquidity risk and other risks like reputational and strategic risk.
What is the difference between 'risk transfer' and 'risk avoidance' as mitigation strategies?
Transfer shifts risk to another party; avoidance eliminates the risky activity entirely.
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