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Risk Management > Risk Concepts > Flashcards

Risk Concepts Flashcards

1
Q

state 3 differences between risk and uncertainty

A
  • Risk can be quantified, uncertainty cannot.
  • Risk is necessarily negative; uncertainty can be negative or positive.
  • Risk can be insured, uncertainty cannot.
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2
Q

what are the three characteristics of black swan events

A
  1. Outlier
  2. Impactful
  3. Prone to be rationalized after the fact.
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3
Q

name 5 Canadian regulators and who they regulate

A
  • BCBS: global rules
  • OSFI: banks and insurance.
  • FSRA: credit unions
  • CDIC: banks
  • IIROC: investment dealers
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4
Q

what are financial risks

A

risks that are unavoidable in generating profits.

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5
Q

what is a difference between financial and non-financial risks?

A

financial risks are quantifiable, non-financial risks are not.

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6
Q

what are 3 types of financial risk

A

credit, market and liquidity.

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7
Q

what are non-financial risks

A

risks that are inherent to the business

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8
Q

what are three types of non-financial risks

A

operational, cybersecurity, money laundering

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9
Q

what is the risk management framework?

A
  1. First line: business line.
  2. Second line: control functions.
  3. Third line: the firm’s governance, and audit.
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10
Q

at which step in the risk management framework is the risk profile defined?

A

first line by the business line

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11
Q

at which step in the risk management framework are the risk limits defined

A

the second line by the control functions.

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12
Q

what are 5 types of models

A
  • Regulatory capital models
  • Pricing models
  • Risk models
  • Business decision-making models.
  • Stress testing models.
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13
Q

what are 6 sources of model risk?

A
  • inaccurate, inappropriate or incomplete data.
  • Inappropriate specifications.
  • Flawed assumptions and mathematical errors.
  • Code bugs
  • Improper usage.
  • Inadequate monitoring/controls.
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14
Q

what are the 4 levels of the risk hierarchy?

A
  1. risk profile
  2. risk limits
  3. risk appetite
  4. risk capacity
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15
Q

define risk profile

A

risk current amount of risk

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16
Q

define risk limits

A

the total amount of risk that management is willing to accept

17
Q

define risk appetite

A

the total amount of risk the board is willing to accept

18
Q

define risk capacity

A

the total amount of risk a firm can take on without failing

19
Q

what are the two ways in which a company can go bankrupt

A
  1. insolvency: when a firm gradually loses money over time until it owes more than it owns.
  2. illiquidity: when a firm suddenly doesn’t have enough cash to cover its outflows.
20
Q

what is a desired equity/assets ratio

A

8%

21
Q

what is a criticism of the E/A ratio?

A

it is too crude since it doesn’t take into account what the assets and liabilities are.

22
Q

what is the effect of increased deposits on E/A

A

E/A decreases since assets increase

23
Q

what is the effect of increased earnings (interest) on E/A

A

E/A increases since assets and equity are both increased by a constant

24
Q

what is the effect of dividends on E/A

A

E/A decreases since assets and equity are both decreased by a constant

25
Q

what it the effect of a change in asset classes on E/A

A

E/A is unchanged

26
Q

what is risk weighted asset

A

adding different weights to asset classes, an improvement over the E/A

27
Q

what is the formula for RWA

A

RWA=12.5⋅EAD⋅K

28
Q

what are three characteristics of Basel 1

A
  • Introduction of RWA
  • Introduction of exposure to a derivatives counterparty.
  • Introduction of VaR
29
Q

what are 4 characteristics of Basel 2

A
  • Introduction of internal models to assess credit worthiness: PD, EAD, LGD.
  • Introduction of an operational risk component to RWA.
  • Introduction of the 3 pillars: capital adequacy, supervisory review, and disclosure requirements.
  • Introduction of netting
30
Q

what are 2 characteristics of Basel 2.5

A
  • Supplement GMR and SR with a version calibrated on a stressed historical period so more capital is required.
  • Introduction of the incremental risk charge
31
Q

what is the incremental risk charge

A

Estimation of MTM losses from migrations in the credit book.

32
Q

what are 3 characteristics of Basel 3

A
  • Liquidity requirements
  • Leverage ratio
  • Standardized approach to counterparty credit risk.

Risk Management (8 decks)

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