Chapter 7: Risk management in banking

Question 1

who are the 3 main regulators of the NZ financial services industry

Answer 1

• the reserve bank of new zealand (RBNZ)
• Financial Markets Authority (FMA)
• the commerce commission

Question 2

who are the 4 regulators that make up the the council of financial Regulators (COFR)

Answer 2

• the reserve bank of new zealand (RBNZ)
• Financial Markets Authority (FMA)
• the commerce commission
  -Ministry of Business, Innovation and Employment (MBIE)

Question 3

The overarching aim of the ……. is to contribute to maximising NZ’s sustainable economic wellbeing through responsive and coordinated financial system regulation. A core component of this response is the identification and monitoring of risks to overall financial stability

Answer 3

Council of Financial Regulators (COFR)

Question 4

what is the COFR (COuncil of financial regulators)

Answer 4

a non-statutory body without regulatory or policy decision making powers. Those powers rest with its members

Question 5

where the extent that the fragility of a bank or the other financial institution could affect the market and economy as whole is known as what kind of risk?

Answer 5

Macro-Prudential Risk

Question 6

what are the two categories risk can be splis in too

Answer 6

Absolute risk = the situation has only a chance of loss or no loss (NO Gain)
Speculative loss = possibility of loss or gain based on a decision to accept or decline a risk

Question 7

credit scoring has involved into behavioural scoring, a method of determining the credit risk associated with an exisiting account, what are 3 factors often considered in behavioural scoring?

Answer 7

• the savings pattern of a customer
• the regulatory of credit payment made
• any unpaid items

it is further enhanced by live feeds of info from credit reference agencies, which can verify the behaviour of other related bank credit accounts

Question 8

the risk that the loan will not be repaid is what type of risk

Answer 8

Credit or default risk

Question 9

The risk that a bank does not have sufficient level of liquid assets to meet current or future payment obligations is what kind of risk

Answer 9

Liquidity Risk

Question 10

The risk of an adverse impact on a bank’s valuation s and profits resulting from changes in market factor, such as foreign exchange rates, interest rates and commodity or equity prices is what kind of risk

Answer 10

market risk

Question 11

what kind of risk may arise because oof inappropriate, unethical o unlawful behaviuor on the part of bank employees.

Answer 11

conduct risk

Question 12

what type of risk is the risk of loss resulting from inadequate or failed internal processess, people and systems or from external events . (covers things from fraud, human error to fire and floods)

Answer 12

Operational risk

Question 13

what is the risk associated with the vulnerability of a line of business to changes in the business evironment

Answer 13

business risk

Question 14

the loss of reputation, stakeholder confidence or public trust and standing is what kind of risk

Answer 14

reputation risk

Question 15

The threats to a system, market or economic segement is what kind of risk

Answer 15

systematic risk

Question 16

the risk that a bank has not entered into a contract in good faith or has provided misleading information about, assets liabilities or borrowing capacity

Answer 16

Moral Hazard

Question 17

……. risk decrsibes the risk to banks as prudentil measures chage over time

Answer 17

regulatory

Question 18

what are the 3 lines of defence in the risk management framework

Answer 18

1st = business operations (day to day activities & risk processes)
2nd = risk and compliance functions ( develop risk management processes)
3rd = internal audit (objective assessment, review the 1st and 2nd lines of defence)

Question 19

what is the 8 step process for the AS/NZ ISO 31000:2018 Risk management standard principles an guideline activities

Answer 19

• establish context
  risk assessment (which includes)
• risk identification
• risk analysis
• risk evaluation
• risk treatment
  monitoring and review (ongoing)
  communication and consultation (ongoing)

Question 20

why woud workshps be used for risk identifiaction

Answer 20

often used when a bank is about to start a project or implement a major change

Question 21

when is the risk matrix used

Answer 21

in the risk analysis segment

Question 22

what does a risk matrix look at

Answer 22

likelihood (almost certain to rare) and severity of impact (Insignificant to extreme)

Question 23

what is residual risk

Answer 23

the threat that remains after all efforts to identify and eliminate risks have been made

Question 24

risk treatment is a key process, involving a setion of one or more options for mitigating risks what are these 6 options

Answer 24

• avoid
• accept
• remove
• reduce
  -transfer
• change

Question 25

what are risk indicators

Answer 25

are metrics which help with monitoring and control of identified risks over time. they are a ‘health’ check of the performance of the business and can be used by all functions to ensure that risk is controlled satisfactorily. They usually measure risk at set control points in the business and act as an early warning signal to alert problems areas

Question 26

what 4 things make a effective risk indicator

Answer 26

measurable
predictable
comprable
informational

Question 27

what is a risk register

Answer 27

a tool to identify potential risk in a project or an organisation, sometimes to fulfil regulatory compliance but mostly to identify potential issue before they occur. a risk register is the form of a log, and includes info about each identified risk, such as the nature of that risk, level of risk, who owns it and what are the control measures in place to respond to it