👉Banking Business lines may be grouped broadly in 3 major heads:
1. The Banking Book
2. The Trading Portfolio
3. Off-Balance Sheet Exposures.
.........................
👉1. The Banking Book:
The Banking Book includes all advances, deposits and borrowings which is commercial and retail banking business.
All assets and liabilities in banking book have following characteristics:
1.They are normally held until maturity
2. Accrual system of accounting is applied.
..........................
👉Risks in Banking Book are mainly 4 types:
1. Liquidity Risk: All assets and liabilities in the banking book are held until Maturity, maturity mismatch between assets and liabilities result in excess or shortage of liquidity, which is called liquidity Risk.
2. Interest Rate Risk: When Interest rate changes take place during the period is called interest rate Risk.
3. Credit Risk/Default Risk: Assets side banking book generates credit risk arising from defaults in payment of principal and/or interest by borrowers is called Credit Risk or Default Risk
4. Operational Risk : Risks arise due to human failures of Omission or commission, deficiencies in information system and system failure, internel process or external event all are called operational Risks.
.......................
👉2. The Trading Book:
The trading book inculeds all the assets which are marketable like fixed income securities, foreign exchange holdings, commodities etc.
Trading book is subject to adverse movement in market price Until they are liquidated. it is called Market Risk.
Here market risk is also including liquidity risk, default risk or
credit risk and operational risk.
.........................
👉3. Off- Balance Sheet Exposures:
Off-Balance sheet exposure are contingent in nature which included guarantees, letter of credit etc.
All these off-balnce sheet exposures also included liquidity risk, interest rate risk, market risk, default or credit risk and operational risk.
.............................
👉1. Liquidity Risk included:
a. Funding Risk (Difference between Loans and deposits).
It is the need to replace net out flows due to unanticipated withdrawal/nonrenewal of deposit
b. Time Risk (Maturity period of Loan and deposits are different)
It is the need to compensate for nonreceipt of expected inflows of Funds on time, i.e. performing assets turning into non-performing assets.
c. Call Risk (When bank has profitable business but there is contingent liabilities can be arises.) It happens on account of crystalisation of contingent liabilities and Inability to undertake profitable business opportunities when desired.
.............................
👉2. Interest Rate Risk includes:
a. Gap or Mismatch Risk: It arises from holding assets and liabilities and off balance sheet items with different principal amounts, maturity dates & re-pricing dates thereby creating exposure to unexpected changes in the level of market interest rates.
b. Basis Risk: It is the risk that the Interest rate of different Assets/liabilities and off balance items may change in different magnitude. The degree of basis risk is fairly high in respect of banks that create composite assets out of composite liabilities.
c. Yield Curve Risk: Movement in yield curve and the impact of that on portfolio values and income.
d. Embedded Option Risk: Option of pre-payment of loan and Pre-mature of deposits before their stated maturities constitute embedded option risk
e. Reinvestment Risk: Uncertainty with regard to interest rate at which the future cash flows could be reinvested.
f. Net Interest position Risk: When banks have more earning assets than paying liabilities, net interest position risk arises in case market interest rates adjust downwards.
.........................
👉3. Market Risk:
a. Forex Risk : Foreign exchange risk is the risk that a bank may suffer loss as a result of adverse exchange rate movement during a period in which it has an open position, either spot or forward or both in same foreign currency.
b. Market liqudity Risk : Market liquidity risk arises when a bank is unable to conclude a large transaction in a particular instrument near the current market price.
..........................
👉4. Default or credit Risk
a. Counterparty Risk : The Counterparty risk is generally viewed as a transaction financial risk associated with trading rather than standard credit risk.
b. Country Risk: This is the risk that arises due to cross border transactions that are growing dramatically in the recent years owing to economic liberalization and globalization. It is the possibility that a country will be unable to service or repay debts to foreign lenders in time.
......................
👉5. Operational Risk
a. Transaction Risk: Always banks live with the risks arising out of human error, financial fraud and natural disasters.
b. Compliance Risk : Compliance risk is the risk of legal or regulatory sanction, financial loss or reputation loss that a bank may suffer as a result of its failure to comply with any applicable law. It is also called integrity risk.
.......................
👉6. Other Risk
a. Strategic Risk: Strategic risk is the risk arising from adverse business decisions, improper implementation of decisions or lack of responsiveness to industry changes.
b.Reputation Risk: Reputation risk is the risk arising from negative public opinion. This risk may exposed the institution to letigation, financial loss or a decline in customer base.
👉👉👉👉👉👉 MCQ:
1. The banking book is generally not exposed to
a) Liquidity Risk
b)Interest rate risk
c)Credit risk
d)Operational Risk
e)None of these
Ans-e
2. Banking Books does not include which of the following?
a) All deposits and loans
b) All borrowings
c) Capital
d) All of these
Ans- c
3. The banking book does not include.......
a) advances
b) borrowings
c) equities
d) all of these
Ans- c
4. The banking book relates to assets which are....
a) held till maturity and reflected in Balance sheet at acquisition cost.
b) held till maturity and reflected in Banking book at market cost.
c) None of above
d) all of above
Ans- a
5. Banking book exposures are.....
a) Held until maturity and income is booked on accural basis.
b) Held until maturity and income is booked as and when realized.
c) Held for a period and income is booked on accural basis.
d) Held for a period and income is booked as and when realized.
Ans- a
6. Since all assets and liabilities in the banking book are held until maturity, maturity mismatch between assets and liabilities result in excess or shortage of liquidity. This is known as.......risk.
a) market
b) interest
c) operational
d) liquidity
Ans- d
7. Which of the following risks the banking book is Not exposed to ?
1. liquidity
2. market
3. operational
4. credit or default
5. interest
a) only1
b) only2
c) only3
d) both 4 and 5
Ans- b
8. Asset side of the banking book generates .... risk arising from defaults in payments of principal and/or interest by the borrowers.
a) default
b) credit
c)market
d) both a and b
Ans- d
9. select the correct sentence:
a) Banking book is exposed to market risk because it is open to market
b) Banking book is exposed to market risk because it is not open to market
c) Banking book is not exposed to market risk because it is open to market
d) Banking book is not exposed to market risk because it is not open to market
Ans- d
10. Which of the following risks the off balance sheet exposure is Not exposed to ?
1. market
2. liquidity
3. credit or default
4. operational
5. interest
a) only1
b) only3
c) only2 and 4
d) None of these
Ans- d
11. Which of the following is not exposure to off balance sheet?
a) capital
b) swaps
c) futures
d) options
Ans- a
12. Which of the following derivates are the off balance sheet exposure?
a. swaps
b. Futures
c. Forward contracts
d. options
a. a,b,d only
b. a and d only
c. a and c only
d. all of them
ans- d
13. In the financial market, bond prices and yields are....related.
Ans- inversely
14. Financial Risk is defined as:
a) Uncertinities resulting in adverse variation of profitability or outright losses
b) uncertanities that result in outright losses
c) uncertanities in cash flow
d) variations in net cash flow
Ans- d
15. What type of risk conceptualizes in a condition when you are leading a big branch with thousands of customers , the systems(connectivity) have been down for past two days?
a) operational risk
b) capital risk
c) market risk
d) strategic risk
ans- c
16. A branch sanctiones Rs 10 crore loan to a borrower, which of the following risks branch is taking?
1. liquidity
2. Interest rate
3. Market
4. Credit
5. operational
a) all of them
b)1,2, and 3 only
c) 1,4 and 5 only
d) 1,2,4 and 5 only
ans-d
17. Premature payment of a term loan will result in interest rate risk of type
a) basic risk
b) Yield curve risk
c) Embedded option
d) Mismatch risk
ans- c
18. A bank funds its assets from a pool of composite liabilities. apart from credit and operational risks, it faces..
a) Basis risk
b) Mismatch Risk
c) Market Risk
d) liquidity risk
Ans- a
19. Basis risks are type of...
a) Interest Rate risk
b) market Risk
c) credit risk
d) operational risk
Ans- a
20. A bank funds its loans through composite liabilities. in a scenario where interest rate changes across the board the bank immediately stands exposed to
a) Yield curve risk
b. Basis risk
c. Both a and b
d. Neither a nor b
Ans- b
21. When the coasts/ yields of liabilities/assets are linked to a floating rate and there is no simultaneous movement in interest rates, it leads to...
a. real interest rate risk
b. basis risk
c. reinvestment risk
d. volatility risk
ans- b
22. When variation in market interst rate causes the NII to contract, the basis risk would move ... the banks
a. against
b. in favour of
c. no effect
d. none of these
Ans- a
23. When variation in market interst rate causes the NII to expand, the basis risk would move ... the banks
a. against
b. in favour of
c. no effect
d. none of these
Ans- b
24. Yiels Curve risk with respect to different maturity sectors, is a type of...
a) liquidity risk
b) Interest rate risk
c) basis risk
d) market risk
Ans- c
25. Forex risk can be reduced by
a. entering into forward contracts
b. futures
c. derivates of Interest rate swaps
d. both a and b
Ans-d
26. reputation risk is a type of..
a. operational risk
b. market risk
c. Credit risk
d. none of these
Ans-d
27.Poor quality of complaince with regulatory requirements results in ...
a. operational risk
b. market risk
c. Credit risk
d.reputation risk
Ans- a
28. risk of legal or regulatory sanction , financial loss or reputation loss that a bank may suffer as a result of its failure to comply with any or all of the applicable laws, regulations etc. is called as...
a. transaction risk
b. Compliance Risk
c. legal risk
d. systems risk
Ans- b
29. Counterparty Risk is a type of ____
A. Interest Rate Risk
B. Market Risk
C. Credit Risk
D. Operational Risk
Ans- c
👉👉More questions will be updated later on. In case of any mistake please let me know.
Hope you like it. Happy Reading :)
1. The Banking Book
2. The Trading Portfolio
3. Off-Balance Sheet Exposures.
.........................
👉1. The Banking Book:
The Banking Book includes all advances, deposits and borrowings which is commercial and retail banking business.
All assets and liabilities in banking book have following characteristics:
1.They are normally held until maturity
2. Accrual system of accounting is applied.
..........................
👉Risks in Banking Book are mainly 4 types:
1. Liquidity Risk: All assets and liabilities in the banking book are held until Maturity, maturity mismatch between assets and liabilities result in excess or shortage of liquidity, which is called liquidity Risk.
2. Interest Rate Risk: When Interest rate changes take place during the period is called interest rate Risk.
3. Credit Risk/Default Risk: Assets side banking book generates credit risk arising from defaults in payment of principal and/or interest by borrowers is called Credit Risk or Default Risk
4. Operational Risk : Risks arise due to human failures of Omission or commission, deficiencies in information system and system failure, internel process or external event all are called operational Risks.
.......................
👉2. The Trading Book:
The trading book inculeds all the assets which are marketable like fixed income securities, foreign exchange holdings, commodities etc.
Trading book is subject to adverse movement in market price Until they are liquidated. it is called Market Risk.
Here market risk is also including liquidity risk, default risk or
credit risk and operational risk.
.........................
👉3. Off- Balance Sheet Exposures:
Off-Balance sheet exposure are contingent in nature which included guarantees, letter of credit etc.
All these off-balnce sheet exposures also included liquidity risk, interest rate risk, market risk, default or credit risk and operational risk.
.............................
👉1. Liquidity Risk included:
a. Funding Risk (Difference between Loans and deposits).
It is the need to replace net out flows due to unanticipated withdrawal/nonrenewal of deposit
b. Time Risk (Maturity period of Loan and deposits are different)
It is the need to compensate for nonreceipt of expected inflows of Funds on time, i.e. performing assets turning into non-performing assets.
c. Call Risk (When bank has profitable business but there is contingent liabilities can be arises.) It happens on account of crystalisation of contingent liabilities and Inability to undertake profitable business opportunities when desired.
.............................
👉2. Interest Rate Risk includes:
a. Gap or Mismatch Risk: It arises from holding assets and liabilities and off balance sheet items with different principal amounts, maturity dates & re-pricing dates thereby creating exposure to unexpected changes in the level of market interest rates.
b. Basis Risk: It is the risk that the Interest rate of different Assets/liabilities and off balance items may change in different magnitude. The degree of basis risk is fairly high in respect of banks that create composite assets out of composite liabilities.
c. Yield Curve Risk: Movement in yield curve and the impact of that on portfolio values and income.
d. Embedded Option Risk: Option of pre-payment of loan and Pre-mature of deposits before their stated maturities constitute embedded option risk
e. Reinvestment Risk: Uncertainty with regard to interest rate at which the future cash flows could be reinvested.
f. Net Interest position Risk: When banks have more earning assets than paying liabilities, net interest position risk arises in case market interest rates adjust downwards.
.........................
👉3. Market Risk:
a. Forex Risk : Foreign exchange risk is the risk that a bank may suffer loss as a result of adverse exchange rate movement during a period in which it has an open position, either spot or forward or both in same foreign currency.
b. Market liqudity Risk : Market liquidity risk arises when a bank is unable to conclude a large transaction in a particular instrument near the current market price.
..........................
👉4. Default or credit Risk
a. Counterparty Risk : The Counterparty risk is generally viewed as a transaction financial risk associated with trading rather than standard credit risk.
b. Country Risk: This is the risk that arises due to cross border transactions that are growing dramatically in the recent years owing to economic liberalization and globalization. It is the possibility that a country will be unable to service or repay debts to foreign lenders in time.
......................
👉5. Operational Risk
a. Transaction Risk: Always banks live with the risks arising out of human error, financial fraud and natural disasters.
b. Compliance Risk : Compliance risk is the risk of legal or regulatory sanction, financial loss or reputation loss that a bank may suffer as a result of its failure to comply with any applicable law. It is also called integrity risk.
.......................
👉6. Other Risk
a. Strategic Risk: Strategic risk is the risk arising from adverse business decisions, improper implementation of decisions or lack of responsiveness to industry changes.
b.Reputation Risk: Reputation risk is the risk arising from negative public opinion. This risk may exposed the institution to letigation, financial loss or a decline in customer base.
👉👉👉👉👉👉 MCQ:
1. The banking book is generally not exposed to
a) Liquidity Risk
b)Interest rate risk
c)Credit risk
d)Operational Risk
e)None of these
Ans-e
2. Banking Books does not include which of the following?
a) All deposits and loans
b) All borrowings
c) Capital
d) All of these
Ans- c
3. The banking book does not include.......
a) advances
b) borrowings
c) equities
d) all of these
Ans- c
4. The banking book relates to assets which are....
a) held till maturity and reflected in Balance sheet at acquisition cost.
b) held till maturity and reflected in Banking book at market cost.
c) None of above
d) all of above
Ans- a
5. Banking book exposures are.....
a) Held until maturity and income is booked on accural basis.
b) Held until maturity and income is booked as and when realized.
c) Held for a period and income is booked on accural basis.
d) Held for a period and income is booked as and when realized.
Ans- a
6. Since all assets and liabilities in the banking book are held until maturity, maturity mismatch between assets and liabilities result in excess or shortage of liquidity. This is known as.......risk.
a) market
b) interest
c) operational
d) liquidity
Ans- d
7. Which of the following risks the banking book is Not exposed to ?
1. liquidity
2. market
3. operational
4. credit or default
5. interest
a) only1
b) only2
c) only3
d) both 4 and 5
Ans- b
8. Asset side of the banking book generates .... risk arising from defaults in payments of principal and/or interest by the borrowers.
a) default
b) credit
c)market
d) both a and b
Ans- d
9. select the correct sentence:
a) Banking book is exposed to market risk because it is open to market
b) Banking book is exposed to market risk because it is not open to market
c) Banking book is not exposed to market risk because it is open to market
d) Banking book is not exposed to market risk because it is not open to market
Ans- d
10. Which of the following risks the off balance sheet exposure is Not exposed to ?
1. market
2. liquidity
3. credit or default
4. operational
5. interest
a) only1
b) only3
c) only2 and 4
d) None of these
Ans- d
11. Which of the following is not exposure to off balance sheet?
a) capital
b) swaps
c) futures
d) options
Ans- a
12. Which of the following derivates are the off balance sheet exposure?
a. swaps
b. Futures
c. Forward contracts
d. options
a. a,b,d only
b. a and d only
c. a and c only
d. all of them
ans- d
13. In the financial market, bond prices and yields are....related.
Ans- inversely
14. Financial Risk is defined as:
a) Uncertinities resulting in adverse variation of profitability or outright losses
b) uncertanities that result in outright losses
c) uncertanities in cash flow
d) variations in net cash flow
Ans- d
15. What type of risk conceptualizes in a condition when you are leading a big branch with thousands of customers , the systems(connectivity) have been down for past two days?
a) operational risk
b) capital risk
c) market risk
d) strategic risk
ans- c
16. A branch sanctiones Rs 10 crore loan to a borrower, which of the following risks branch is taking?
1. liquidity
2. Interest rate
3. Market
4. Credit
5. operational
a) all of them
b)1,2, and 3 only
c) 1,4 and 5 only
d) 1,2,4 and 5 only
ans-d
17. Premature payment of a term loan will result in interest rate risk of type
a) basic risk
b) Yield curve risk
c) Embedded option
d) Mismatch risk
ans- c
18. A bank funds its assets from a pool of composite liabilities. apart from credit and operational risks, it faces..
a) Basis risk
b) Mismatch Risk
c) Market Risk
d) liquidity risk
Ans- a
19. Basis risks are type of...
a) Interest Rate risk
b) market Risk
c) credit risk
d) operational risk
Ans- a
20. A bank funds its loans through composite liabilities. in a scenario where interest rate changes across the board the bank immediately stands exposed to
a) Yield curve risk
b. Basis risk
c. Both a and b
d. Neither a nor b
Ans- b
21. When the coasts/ yields of liabilities/assets are linked to a floating rate and there is no simultaneous movement in interest rates, it leads to...
a. real interest rate risk
b. basis risk
c. reinvestment risk
d. volatility risk
ans- b
22. When variation in market interst rate causes the NII to contract, the basis risk would move ... the banks
a. against
b. in favour of
c. no effect
d. none of these
Ans- a
23. When variation in market interst rate causes the NII to expand, the basis risk would move ... the banks
a. against
b. in favour of
c. no effect
d. none of these
Ans- b
24. Yiels Curve risk with respect to different maturity sectors, is a type of...
a) liquidity risk
b) Interest rate risk
c) basis risk
d) market risk
Ans- c
25. Forex risk can be reduced by
a. entering into forward contracts
b. futures
c. derivates of Interest rate swaps
d. both a and b
Ans-d
26. reputation risk is a type of..
a. operational risk
b. market risk
c. Credit risk
d. none of these
Ans-d
27.Poor quality of complaince with regulatory requirements results in ...
a. operational risk
b. market risk
c. Credit risk
d.reputation risk
Ans- a
28. risk of legal or regulatory sanction , financial loss or reputation loss that a bank may suffer as a result of its failure to comply with any or all of the applicable laws, regulations etc. is called as...
a. transaction risk
b. Compliance Risk
c. legal risk
d. systems risk
Ans- b
29. Counterparty Risk is a type of ____
A. Interest Rate Risk
B. Market Risk
C. Credit Risk
D. Operational Risk
Ans- c
👉👉More questions will be updated later on. In case of any mistake please let me know.
Hope you like it. Happy Reading :)
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