Risks and Risk Management in Banks
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Risk Management (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 66 rapid-fire Q&A cards.
What is the primary definition of risk in the context of banking operations?
Risk is the possibility that an actual outcome will differ from the expected outcome, potentially resulting in financial loss or reputational damage for the bank.
What is residual risk in banking and how does it arise after applying risk controls?
Risk remaining after mitigation measures have been applied.
Which three broad categories of risk does the Basel Committee on Banking Supervision identify as most significant for banks?
The Basel Committee identifies credit risk, market risk, and operational risk as the three primary risk categories that banks must measure and manage under the Basel framework.
What is the difference between inherent risk and residual risk in risk assessment?
Inherent risk exists before controls; residual risk remains after controls.
What distinguishes systematic risk from unsystematic risk in banking?
Systematic risk affects the entire market or banking system and cannot be diversified away, while unsystematic (idiosyncratic) risk is specific to a particular borrower or asset and can be reduced through diversification.
What is price risk in the context of a bank's trading portfolio?
Risk of loss due to adverse movements in market prices of securities.
What is credit risk and why is it the most significant risk for commercial banks?
Credit risk is the risk that a borrower or counterparty will fail to meet its contractual obligations; it is the most significant risk for commercial banks because lending constitutes the core of their business.
What is basis risk and in which type of banking book does it primarily occur?
Risk from imperfect correlation between interest rate benchmarks in banking book.
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