Module 1 - Unit 5 Risk Assessment 2: Risk Analysis And Evaluation

Question 1

What is a Risk Analysis?

Answer 1

Risk analysis help to determine the severity of the risks by analysing the likelihood of a risk materialising together with the impact on the organisation.

Question 2

What is a Risk Appetite and Risk Evaluation?

Answer 2

Risk Appetite - how much risk we are willing to take?

Risk Evaluation - what should we do?

Question 3

What is a Risk Matrix?

Answer 3

A risk matrix is is a risk analysis took used to assess risk likelihood and severity.

Question 4

What is a risk Likelihood, Probabilty and Frequency?

Answer 4

• Likelihood - measures the chances of a specific event ocurring which captures the probability and frequency of an event.

• Probability - likelihood can be expressed numerically as value between 0 and 1 (or 0% and 100%) - e.g., “there is a 2% chance to rain’

• Frequency - likelihood can be expressed numerically as a frequency measurement. Eg., ‘in just one day in 2005 hurricane Katrina resultated in an 1 in 100 year flood to New Orleans’

Question 5

How can an impact be measured?

Answer 5

• Quantitative - (through VaR and stress testing) e.g., Credit Risk

• Qualitative - ( by describing the impact using high-medium-low) e.g., Operational Risk

Question 6

How would you describe the Inherent, Current and Target Risk?

Answer 6

• Inherent risk - is the risk without applying any controls

• Current Risk - the risk as it stands with the existing controls

• Target Risk is the desired optimal level of risk

Question 7

What are the 3 advantages of using internal models as risk analysis?

Answer 7

1. Ensures a firm uses a comprehensive risk management system
2. Incentives firm to improve their own estimates of risk exposure
3. Firm can hold lower regulatory minimum capital

Question 8

Describe riskiness index

Answer 8

Riskiness index is the level of risk faced by FIRM (finances, infrastructure, reputation and marketplace.

Question 9

Solvency II - Internal Model (6 tests)

Answer 9

1. Statistical quality standards
2. Calibration standards
3. Validation standards
4. Documentation
5. Profit and loss attribution
6. Use test

Question 10

Basel III Internal Model (4 standards)

Answer 10

1. The bank’s risk management system is sound and implemented with integrity
2. Staff is skilled to use sophisticated models
3. Bank model has a proven track record or measuring risk and reasonable accuracy
4. The bank regularly conducts prescribed stress testing

Question 11

How the Upside Risk can be achieved?

Answer 11

The upside of risk is achieved when the benefits obtained from taking the risk are greater than the benefits resulted from not taking it. Such as:

• Fewer disruptions to normal operations and greater operational efficiency resulting in less downside of risk.
• Ability to seize an opportunity that competitors missed.

Question 12

6 Reasons why analysing risk is important

Answer 12

1. Prioritise risks for treatment in terms of their significance
2. Compare risks with the risk appetite
3. Achieve consistent perceptions of significance
4. Inform decisions on how resources are allocated
5. Inform decisions about new investment, projects etc.
6. Ensure capital adequacy

Question 13

Solvency II Internal Model (Principles)

Answer 13

1. Senior Management understand the internal model
2. The internal model fits the business model
3. The internal model is used to support and verify decision making
4. The internal model is widely and consistently integrated into the risk management system
5. The internal model is used to improve the firm’s risk management system.