Final day prep cards Flashcards
What are the 6 BIS Risks
Operational, Credit, Market, Asset Liquidity, Funding Liquidity, Interest Rate
What 4 risks are covered under market participant risks
Credit, Operational,Market,Liquidity
What did BASEL 2 introduce a requirement for?
Operational risk management
What is a ‘Moral Hazard’
Staff behave differently when protected from the effects of risk they take
Out of the three pillars, which one is Semi-Formulaic
Pillar 1
What does not have an impact on financial reporting
Unauthorized trading
Out of the three pillars which one is quantative in nature?
Pillar 1
How often is back testing done and what must happen if figures aren’t good
Daily and revise VAR
Who is the global standard setter for prudential regulation?
BCBS
6 BCBS Preconditions?
Macroeconomic polices
Framework for financial stability
Rules governing financial markets
Public Infrastructure
Clear framework for crisis management
Systemic protection
Market discipline
Pillar 1 basel accord
Min reg requirments (8%)
Pillar 2 basel accord?
Supervisory process
Basel committe risk type - Client, products and Business practices
failure to meet client obligations or design failures of products
Pillar 3 basel accord?
Market discipline
Order of Risk Management>
Identification
Measure & Assessment
Mgmt and Cntrl
Risk Monitoring
Risk Reporting
Risk policy & appetite
Basel Committe risk type - Execution, delivery and process management
Losses from failed processes or from failed counterparties and vendors
Main function of risk reporting
Setting limits, recording breaches and near misses
Financial crime - What is Placement
Introduction of dirty money in financial system
Financial crime - What is Layering
Moving money around to make it harder to track
Financial crime - What is Integration
Clean money is now in the system
What does Historical Event Data Evaluation do for a firm?
Places losses in SET CATEGORIES
How are KRIs difficult to obtain?
Automatically
What risk is hardest to asses and measure?
People
Is operational risk policy a document or a process
Document
What four things make make up portfolio credit risk?
Securitization, diversification, loan sales and credit derivatives
Are credit ratings long or short term
Short, usually both but mainly short
CAA, CCC, CA,C
These are the credit risk rating rankings for C. CAA is highest
Whats not taken into account when credit ratings make their ratings
Length of time trading
What are credit migration probabilites used in?
Credit VAR
What analysis makes historical prediction from future losses?
Distribution analysis
What type of graph does Normal distribution have?
Bell curve
Another term for normal distribution
Gaussian Distribution
What has fat tails?
Non-Normal distributions
What is VAR dependable on?
Good historical data
What can predicating tracking error otherwise be called
Ex Ante
Is market timing active or passive?
Active
What three risks should not be considered in isolation
Operational, credit and market
How often is a matuirty ladder recorded
Daily
The smaller the spread?
More liquid market
Why is it important to have the board of directors accountable?
Ensure consistency across the board
What os the Parametric approach
Reading off a graph, distribution of returns can be plotted.
Advantage of Historical simulation
conceptually simple enough & no need to make assumptions about distribution
How are returns distributed in the parametric approach
Normally distributed
Disadvanatge of historical simulation
History will repeat itself
Advantage to Parametric Approach
Simplest method
Disadvantage to parametric
If returns are not normally distributed, inaccurate results
Advantage of Monte Carlo approach
Can be used for non normally distributed items
Sharpe ratio makes use of
Risk free return
Information ratio makes use of
Tracking error
High inforamtion ratio is a sign of what
Successful fund manager
What crates an interest rate exposure?
Balance sheets
How is operational risk distributed?
Not normally, fat tails
Who should chair the risk committee?
Non-exec director
BIS Crucial elements of an effective operational risk management framework
Clear risk oversight by the board and senior management
Strong operational risk culture
Stronger internal culture
Clear lines responsibility
Seg of duties
Effective internal reporting
Contingency planning
Is Segregation of duties a preventive or defective control?
Preventive
It would be usual for an operational risk policy to consider?
Key officers
Remuneration
Roles and Responsibilities
Training
Roles and Responsibilities
What type of financial services is likely to have greatest exposure to credit risk?
Ifas
Banks
Custodians
Re-insurers
Banks
How often do banks normally maintain counterparty credit limits in regard to liquidity risk?
Intra day (within the day)
What regulation is driving towards an ERM approach
Basel - Pillar 2
Most popular measurement of concentration
HHI
What is excluded from the HHI ?
Borrowers credit quality
Monte carlo uses what distribution?
Poisson
Why would a company hold a risk assessment workshop?
to bring out the risk factors that could prevent their successful implementation or continuation
Top down and bottom up approaches associated with ?
Risk appetite
CRedit migration probabilities used in?
Trading Book
Impairment criteria (4)
Liquidity issues
Breach of contract
Bankruptcy (downgrade of credit status)
Borrower/lender financial difficulties
