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Question 1

credit risk

Answer 1

• Definition: The risk that borrowers will default on loans or other financial obligations.
• Mitigation Techniques: Diversifying loan portfolio, setting credit limits, performing credit analysis, maintaining regulatory capital, reporting credit risk exposures.

Question 2

2. Interest Rate Risk

Answer 2

• Definition: The risk that changes in interest rates will negatively impact the value of the bank’s assets and liabilities.
• Mitigation Techniques:
  a) Matching maturities of assets and liabilities,
  b) using interest rate derivatives to hedge

Question 3

3. Liquidity Risk

Answer 3

• Definition: The risk a bank can’t meet its financial obligations due to an inability to convert assets into cash quickly or at a reasonable price.
• Types:
  a) Market liquidity risk (can’t sell assets quickly enough or at a reasonable price)
  b) funding liquidity risk (can’t obtain enough funding).
• Mitigation Techniques: Maintaining a portfolio of liquid assets, diversifying funding sources, implementing liquidity management plans, maintaining regulatory liquidity buffer, reporting liquidity risk profile.

Question 4

4. Foreign Exchange (FX) Risk

Answer 4

• Definition: The risk that changes in foreign exchange rates will negatively impact the value of a bank’s assets or liabilities.
• Mitigation Techniques: Hedging with currency derivatives, diversifying currency exposure, implementing FX risk management policies.

Question 5

5. Market Risk

Answer 5

• Definition: The risk that changes in market prices will negatively impact the value of the bank’s assets, liabilities, and off-balance sheet positions.
• Note: Also referred to as “systematic risk”, which cannot be diversified away.

Question 6

6. Off-Balance-Sheet Risk

Answer 6

• Definition: The risk a bank is exposed to through its off-balance-sheet activities, such as commitments, guarantees, and derivatives.
• Examples: Commitments like letters of credit, standby loan commitments, and contingent liabilities.
• Mitigation: Report off-balance sheet risk exposures and related capital requirements

Question 7

7. Technology and Operational Risk

Answer 7

• Definition: The risk incurred when a bank’s technological investments do not produce expected cost savings, or when existing technology, auditing, monitoring, and other support systems malfunction.

Question 8

8. Fintech Risk

Answer 8

• Definition: The risk that fintech firms could disrupt the business of financial services firms in the form of lost customers and revenue.

Question 9

9. Insolvency Risk

Answer 9

• Definition: The risk that the bank will not be able to meet its financial obligations as they come due, and that it will be unable to continue its operations.
• Mitigation Techniques: Maintain certain levels of capital and liquidity, submit recovery and resolution plans to regulators.