Summary - Other Risks

Question 1

LIQUIDITY RISK
Explanation

Answer 1

Liquidity risk is the risk of being unable to meet obligations as they fall due, without incurring unacceptable losses — even if the firm is solvent.

It includes:
- Funding liquidity risk: Can’t raise cash when needed.
- Market liquidity risk: Can’t sell assets quickly at fair value.

Question 2

LIQUIDITY RISK
Typical Risk Controls (7)

Answer 2

Cash flow forecasting & stress testing:
- Test ability to meet obligations under stress.

Liquidity buffers:
- High-quality liquid assets (HQLA) to meet short-term needs.

Diversified funding sources:
- Reduce reliance on any one provider or market.

Liquidity coverage ratios:
- Regulatory and internal metrics to ensure resilience.

Contingency funding plans:
- Pre-agreed actions if liquidity dries up.

Maturity mismatch management (ALM):
- Align asset/liability cash flow profiles.

Limits on illiquid assets:
- Caps on private equity, real estate, etc.

Question 3

LIQUIDITY RISK
Unique Factors (5)

Answer 3

Contagion & reputational effects:
- Liquidity panic can spread rapidly (even if unfounded).

Procyclical nature:
- Liquidity dries up precisely when you need it most.

Interaction with market risk:
- Forced selling in stressed markets = fire sale losses.

Off-balance-sheet exposures:
- Undrawn credit lines or derivative collateral calls can strain cash.

Regulatory oversight:
- Solvency II, LCR/NSFR under Basel III may impose constraints.

Question 4

LIQUIDITY RISK
Acronym

Answer 4

“FLUID”
Forecasting & stress testing

Liquidity buffers

Unencumbered assets & funding sources

Illiquid asset limits

Drills & contingency plans

Use FLUID to remember that liquidity must flow — or the firm fails.

Question 5

Identification of causes of risk in various scenarios

Answer 5

PESTLE

Political risks
Economic risks
Social risks
Technological risks
Legal risks
Environmental risks

Question 6

Insurance (Underwriting) Risk
Explanation, Controls, and Unique Factors

Answer 6

Risk that actual claims experience is worse than expected (frequency, severity, timing, reserves).

Typical Controls:
- Pricing and underwriting discipline
- Reinsurance
- Reserving governance
- Claims management
- Experience monitoring and data quality

Unique Factors:
- Long-tailed vs short-tailed risk
- Latent claims (e.g. asbestos)
- Catastrophe exposure
- Moral hazard & adverse selection

Question 7

Strategic Risk
Explanation, Controls, and Unique Factors

Answer 7

Explanation:
Risk from poor decisions, business model flaws, or failing to adapt.

Typical Controls:
- Strategic planning & review processes
- Scenario planning
- Board oversight and challenge
- Market intelligence & competitor analysis

Unique Factors:
- Hard to quantify
- Often driven by external change (tech, regulation, disruption)
- Long-term impact but slow to surface

Question 8

Model Risk
Explanation, Controls, and Unique Factors

Answer 8

Explanation:
Risk of loss due to incorrect or misused models.

Typical Controls:
- Model validation and peer review
- Clear documentation and version control
- Model risk policies and oversight committees
- Stress testing and backtesting

Unique Factors:
- Overreliance and complacency
- Garbage in, garbage out
- Hidden assumptions or poor governance

Question 9

Three Lines of Defence
What are they + acronym

Answer 9

1️⃣ First Line – Risk Owners (Business Functions)
“They own and manage risk.”

• Day-to-day operational management
• Responsible for identifying, assessing, and controlling risks
• Make business decisions within the risk appetite

🛠️ Examples: Underwriting teams, asset managers, operations staff
📌 Use when: You’re discussing ownership, embedding risk culture, or accountability.

2️⃣ Second Line – Risk Oversight (Risk and Compliance Functions)
“They set the framework and challenge the first line.”

• Develop risk policies, appetite, and limits
• Monitor risk exposure and ensure compliance
• Provide guidance and oversight

🛠️ Examples: Risk management team, compliance, actuaries (sometimes)
📌 Use when: Recommending enhancements to risk governance or escalation protocols.

3️⃣ Third Line – Independent Assurance (Internal Audit)
“They independently assess both the first and second lines.”

• Evaluate effectiveness of risk management and controls
• Provide assurance to the Board and audit committee
• Fully independent from day-to-day risk taking

🛠️ Examples: Internal audit, external audit (in some frameworks)
📌 Use when: You need assurance, lessons learned, or reviewing governance failures.

🔑 Quick Acronym: “OWN – GUIDE – CHECK”
OWN the risk (1st)
GUIDE and oversee it (2nd)
CHECK it independently (3rd)