Operational risk, liquidity risk, Basel regulations and risk-based performance.
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- Define operational risk.
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The risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events.- What is the difference between internal and external fraud in operational risk?
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Internal fraud: deliberate deception by employees. External fraud: deliberate deception by third parties outside the firm.- Name the Basel III regulatory pillars.
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Pillar 1: Minimum capital requirements. Pillar 2: Supervisory review. Pillar 3: Market discipline and disclosure.- What does the Standardized Approach for operational risk require?
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Capital charge for operational risk based on a fixed percentage of gross income in each business line.- Explain the Advanced Measurement Approach (AMA) for operational risk.
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Banks use internal loss data, scenario analysis, and external data to measure operational risk capital; subject to regulatory approval.- What is a Key Risk Indicator (KRI)?
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A measurable metric used to identify early warning signals that operational risk is increasing.- Define liquidity risk.
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The risk that a bank cannot meet its short-term obligations or must sell assets at a loss due to inability to raise cash quickly.- What is the Liquidity Coverage Ratio (LCR)?
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A Basel III metric requiring high-quality liquid assets to cover net cash outflows over a 30-day stress scenario; minimum 100%.- What is the Net Stable Funding Ratio (NSFR)?
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A Basel III metric that requires available stable funding to exceed required stable funding over a one-year stress period; minimum 100%.- What are the eight Basel III operational risk categories?
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Internal fraud, external fraud, employment practices, business disruption, damage to assets, clients and products, execution and delivery, and other operational events.- What is RAROC?
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Risk-Adjusted Return on Capital; net return from a business divided by the risk capital (economic capital) allocated to it.- What is RORAC?
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Return on Risk-Adjusted Capital; similar to RAROC but emphasizes the denominator (risk capital allocated).- What are high-quality liquid assets (HQLA) under LCR?
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Highly liquid assets that can be converted to cash immediately without significant loss, including cash, central bank reserves, and government securities.- Define the bid-ask spread.
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The difference between the asking price (what sellers want) and the bidding price (what buyers offer) for a security.- What is market depth?
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The amount of buy and sell orders at various price levels; measures the market's ability to absorb large trades without significant price movement.
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