PrinciplesOfRiskManagement Flashcards
(34 cards)
What is the difference between risk and uncertainty?
Risk: variability quantified as probabilities. Uncertainty: unquantified variability.
What key activities are carried out at board level within a simple risk framework?
Risk policies & governance.
What are the three main ways political change can affect the financial services sector?
- Market rise or fall
- Increase/decrease in product demand
- Regulatory change
Name two external stakeholders that can be a source of risk for a business.
- Large customers
- Institutional investors with significant holdings
How can environmental, social, and governance (ESG) issues impact a business?
E: Scarcity of raw materials/natural resources
S: Stakeholder opposition, product liability (e.g., safety)
G: Governance issues, board/employee corruption, financial instability
What is meant by a firm’s ‘risk appetite’?
Amount of risk firm willing to tolerate to achieve business success.
What is the difference between gross (inherent) risk and net (residual) risk?
Inherent (Gross) risk: risk before mitigation controls are applied. Residual (Net) risk: risk after mitigation controls.
Why should risk management staff be involved in product development projects from an early stage?
To advise on the likelihood and impact of any risks after cost benefit analysis.
What sort of risk is associated with contagion?
Systemic: risks that affect one firm, or a group of firms, affecting the stability of the whole financial system.
Why might regulators strive to keep a troubled bank operating?
Impact on financial system is more severe if a bank fails.
Give two examples where high levels of systemic financial risk led to widespread harm to the economy.
- Wall Street Crash of 1930s
- 2008-09 global credit crisis
What are the key risks associated with crypto assets?
- Unclear or no regulation
- Increased financial crime such as fraud & AML
- Cyber security risks: extortion, planting malware
- Data breaches risks such as hacking
- Custody and safekeeping, theft of keys and hacking
- Market risk such as value fluctuation
What is the name given to a risk that could affect the whole financial services sector?
Systemic.
What example of moral hazard is regulatory capital a response to?
Depositors not checking a bank’s viability, making a run on banks more likely.
What is the first national pre-condition for adopting the Basel Accord?
Adoption of sound and sustainable macroeconomic policies.
Which of the Basel Pillars deals with the supervisory review process?
Pillar 2.
What is the difference between stress testing and scenario analysis?
- Stress Testing: varying one input factor at a time.
- Scenario Analysis: constructing realistic scenarios based on past extreme events.
What is meant by the ‘use-test’ within the internal capital and liquidity assessment process?
The extent to which Risk-Based Decision Making is embedded within the firm.
Why might a specific risk type be included in both a firm’s Pillar 1 and Pillar 2 returns?
Because it relates to a firm’s risk exposure.
What are the two differentiating factors between statutory- and principles-based regulation?
- Statutory: based on specific legal rules that must be obeyed.
- Principles: sets out in general terms the expected behaviour of firms and individuals.
What is meant by ‘conduct risk’?
The risk of a firm behaving in a way that delivers poor outcomes for customers.
If a firm or its staff break the law, what are three potential harmful effects?
- Reputational damage
- Withdrawal of regulatory authorisation
- Fines/penalties
1.2.1 Economic Risk
Human behavior drives economic trends—consumer demand, spending habits, and market activity shape risks for businesses.
Environmental Risks: How does water scarcity impact economies?
The World Bank estimates it could cost some countries up to 6% of their GDP
