lect 6

• The first step in bank risk management is the identification
• Risks are identified as the results of uncertainty deriving from specific risk factors.

  True
• Match the risk measure with its purpose:

  Expected losses ↔️ Provision for loan losses

  Unexpected losses ↔️ Deviation from expected outcome
• The management of risks is based on the risk appetite
• The graph compares the interest rates of assets and liabilities
• What is the interest rate on assets in year 1 as shown in the graph?

  9%
• The interest rate on liabilities remains constant at 7% over the two-year period.

  
• What is the definition of credit risk?

  Failure to meet obligations
• What is the initial interest rate for assets?

  9%

  
• One relevant factor for credit risk models is the probability of default
• The banking book refers to assets on a bank's balance sheet that are expected to be held to maturity.


  True
• What is market risk defined as?

  Losses from market price movements
• One measure of market risk is Value-at-Risk
• Market risk is now a critical part of capital adequacy rules due to increased trading activities by banks.


  True
• Liquidity risk is generated by the mismatch in size and maturity between assets and liabilities.

  True
• What is interest rate risk?

  Unexpected changes in interest rates
• One type of liquidity risk is day-to-day liquidity risk
• Match the type of interest rate risk with its description:

  Refinancing risk ↔️ Asset-transformation function

  Reinvestment risk ↔️ Changes in interest rates
• What is foreign exchange risk?

  Exchange rate fluctuations affecting bank assets
• Match the type of risk with its description:

  Country risk ↔️ Economic, social, and political conditions affecting banks

  Sovereign risk ↔️ Government default on debt
• Order the risk event types of operational risk:

  1️⃣ Internal fraud

  2️⃣ External fraud

  3️⃣ Clients, products and business practices

  4️⃣ Business disruption and system failures
• Operational risk is the risk of loss resulting from inadequate internal processes, people, systems, or external events
• A bank lending in a depreciating currency will be subject to foreign exchange risk.


  True
• Steps in managing market risk using the risk decomposition approach:

  1️⃣ Organize trading room with traders responsible for specific market variables

  2️⃣ Ensure risk measures are within limits

  3️⃣ Calculate total risk faced by the bank

  4️⃣ Implement diversification if risks are unacceptably high
• Risks are often interrelated and can affect bank capital or earnings.


  True
• One broad risk management strategy is to identify risks one by one and handle each of them separately
• Credit risk is traditionally managed using risk aggregation.


  True
• To reduce credit risk, a bank should adopt a more diversified
• Match the risk mitigation tool with its purpose:

  Guarantees ↔️ Reduce loss given default

  Derivatives ↔️ Reduce earnings volatility
• What is systemic risk in credit risk management?

  Variations in default probability