GARP Financial Risk and Regulation 2016-FRR Questions & Answers

• Question 1:

  Which one of the following four statements about economic capital of a bank is correct?

  A. Economic capital measures how the economy is doing compared to the bank.

  B. Economic capital reflects the possible losses that could occur based on the bank's own estimates of the risks it is taking.

  C. Economic capital is determined by rules imposed by an external authority.

  D. Economic capital is the present value of the earnings generated by the bank in the future.

  Correct Answer: B

• Question 2:

  A customer of EtaBank, Alfred Fall, fell on the marble floors of the bank and sustained substantial injuries. Subsequently, he won a personal injury claim of $50,000 against EtaBank. How should EtaBank's operational loss data event information database categorize this event?

  A. This event would qualify as "Business Disruption and System Failures".

  B. This event would qualify as "Employment Practices and Workplace Safety".

  C. This event would not qualify as an operational risk event.

  D. This event would qualify as "Legal Risk".

  Correct Answer: B

• Question 3:

  Bank Omega is using futures contracts on a well capitalized exchange to hedge its market risk exposure. Which of the following could be reasons that expose the bank to liquidity risk?

  I. The bank may not be able to unwind the futures contracts before expiration.

  II. Prices may move such that a loss results on the hedge.

  III. Since futures require margins which are settled every day, the bank could find itself scrambling for funds.

  IV.

  Exchange margin requirements could change unexpectedly.

  A.

  III, IV

  B.

  I, III, IV

  C.

  I, II, III, IV

  D.

  I, IV

  Correct Answer: A

• Question 4:

  According to Basel II what constitutes Tier 3 capital?

  A. Subordinated debt issues that pay interest.

  B. Debt capital that can only be used to support market risk in the trading book of the bank.

  C. Preference shares that confer on issuers the right to defer payment of a fixed dividend.

  D. Hybrid debt capital instruments that are similar to equity.

  Correct Answer: B

• Question 5:

  Which one of the following market risk measures evaluates the bank's earnings sensitivity?

  A. Cash flow stress testing

  B. Large exposure risk identification

  C. Earnings-at-risk stress testing

  D. Value-at-risk back testing

  Correct Answer: C

• Question 6:

  Which one of the following four statements about planning for the operational risk framework is INCORRECT?

  A. Planning for the operational risk framework involves setting clear goals, realistic milestones and achievable deliverables that add value.

  B. An operational risk framework is a complex and evolving challenge, and to keep its development under control it is important to apply strong project management skills to the design and implementation of each new element.

  C. Planning for the operational risk framework suggests that short-term planning and focus on immediate benefits is strongly preferred to the long-term planning approach.

  D. Once the elements of an operational risk framework are up and running, they need to be monitored to ensure they maintain their integrity and do not deteriorate over time.

  Correct Answer: C

• Question 7:

  Which one of the four following statements about consortium databases is correct? Consortium databases:

  A. Gather information from news articles.

  B. Use data from the top 5% of the industry.

  C. Provide data to map risk categories with causes.

  D. Contain anonymous information.

  Correct Answer: D

• Question 8:

  Which of the following about the ratios between various Tiers of capital is not a requirement of the Basel Committee?

  A. Tier 2 capital cannot exceed 50% of the bank's total regulatory capital.

  B. Innovative instruments in Tier 1 are limited to a maximum of 15% of Tier 1 capital.

  C. Lower Tier 2 capital may only equal 50% of core capital.

  D. Upper Tier 2 capital may only equal 30% of core capital.

  Correct Answer: B

• Question 9:

  Securitization is the process by which banks:

  I. IssueIssue bonds where the payment of interest and repayment of principal on the bonds depends on the cash flow generated by a pool of bank assets.

  II. Issue bonds where the bank has transferred its legal right to payment of interest and repayment of principal to bondholders.

  III.

  Sell illiquid assets.

  A.

  I, II

  B.

  I

  C.

  I, III

  D.

  I, II, III

  Correct Answer: D

• Question 10:

  Which one of the following four statements correctly identifies the Basel II Accord's definition of operational risk?

  A. Operational risk is all the risk that is not captured by market and credit risks.

  B. Operational risk is the risk of loss resulting from inadequate or failed processes, people and systems or from external events.

  C. Operational risk is a risk arising from execution of a company's business functions.

  D. Operational risk is a form of risk that summarizes the risks a company or firm undertakes when it attempts to operate within a given field or industry.

  Correct Answer: B