Risk and Basic Risk Management Framework
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Bank Financial Management — CAIIB.
One-liners from this chapter
Free sample — 8 of 98 rapid-fire Q&A cards.
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.
Name the five major banking risks.
Credit, liquidity, interest-rate, market, operational risk.
Define liquidity risk.
Inability to meet payment obligations as due without selling assets at loss.
What is interest-rate risk?
Adverse impact on NII or economic value of equity due to interest-rate movement.
Define basis risk with example.
Two transaction legs priced off different benchmarks move independently; floating loan vs. fixed deposit.
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