100 exam questions distributed as: Ch 1 · 13Ch 2 · 7Ch 3 · 18Ch 4 · 16Ch 5 · 12Ch 6 · 11Ch 7 · 8Ch 8 · 4Ch 9 · 5Ch 10 · 6 Chapters 3 and 4 (operational and credit risk) carry over a third of the paper between them; chapters 1, 3, 4, 5 and 6 together are about 70 questions.
| Risk | Possible harm: impact × probability |
| Risk vs uncertainty | Quantifiable vs cannot be quantified |
| Simple framework | Board policy · risk function oversight · business day to day |
| Operational drivers | People · processes · systems · external events |
| PESTLE | Political, Economic, Social, Technological, Legal, Environmental |
| ESG | Environmental · Social · Governance |
| Strategic risk: 2 questions | Is the strategy right? Is it implemented properly? |
| Financial risks | Credit · market · liquidity |
| Risk appetite | Type and amount of risk a firm will accept (tolerance) |
| Top-down | Board and senior management: capital, scenarios |
| Bottom-up | Line management: acceptable occurrences, KRIs |
| Inherent / gross risk | Before mitigating controls |
| Residual / net risk | After controls; may not be zero |
| Conduct risk | Firm's behaviour causes poor customer outcomes |
| Stress test | One input factor at a time |
| Scenario analysis | Realistic combinations, often past extremes |
| BIS risk areas | Operational · credit · market and asset liquidity · funding liquidity · interest rate |
| Asset liquidity risk | Cannot unwind a position near market value |
| Funding liquidity risk | Cannot get funds when obligations fall due |
| Interconnectedness | Interactions between risks are non-linear |
| Systemic risk / contagion | Failure spreads to threaten the whole system |
| Sovereign default risk | State guarantees banks but cannot honour it |
| Recovery and resolution plans | Credible recovery + orderly failure |
| GDPR fine | €20m or up to 4% of global turnover, whichever is greater |
| Crypto custody | About private keys; hot online, cold offline |
| BIS | Bank for central banks · 1930 · Basel · guidelines not law |
| BCBS | Standard-setter for bank prudential regulation |
| Bank run fix and side effect | Deposit insurance + lender of last resort → moral hazard → minimum capital |
| Economic vs regulatory capital | Own estimate vs mandatory level |
| Accord risks | Credit · market · operational |
| Basel III/IV additions | Countercyclical buffer · leverage ratio · NSFR and LCR |
| Core Principles | 29 · 1-13 supervisors · 14-29 banks · 6 preconditions |
| Pillar 1 | Capital > 8% × (credit + market + operational) |
| Pillar 2 | Supervisory review |
| ICAAP / ICARA | Banks / investment firms |
| Pillar 3 | Market discipline · public disclosure |
| Use test | Is risk-based decision-making embedded? |
| Concordat | Consolidated home supervision · home and host consent |
| Statutory vs principles-based | Specific rules (US SEC) vs general expected behaviours (UK) |
| FCA objectives | Protect consumers · protect markets · promote competition |
| FCA vs PRA | Conduct vs capital-focused |
| Principles for Businesses | 11 (first 5 indirect, next 5 direct, 1 regulators) |
| Supervision intensity | Impact and probability scores |
| Breaking the law: harms | Reputation · authorisation · fines · liability · staff |
| Definition | Loss from failed processes, people, systems or external events; includes legal, excludes reputation |
| 7 Basel event types | Internal fraud · external fraud · employment practices · clients/products · physical assets · business disruption · execution/delivery |
| Policy: 4 areas | Key officers · roles · segregation of duties · cross-functional |
| Barings | Failed segregation of duties |
| Framework stages | Policy → identify → assess → manage → monitor → report → policy |
| Trigger vs limit | Trigger = amber; limit = red |
| 4 causes | People · process · system · external event |
| Risk score | Likelihood × impact |
| Scenario analysis | Top-down, risk combinations |
| Bottom-up | Process-level risks and controls rolled up |
| KRIs | Forward-looking, likelihood drivers; amber and red |
| Expected losses | Budget / revenues; within appetite |
| Unexpected losses | Low frequency, high cost: capital or insurance |
| Constraints | Data · cultural · resource and cost · indicator |
| 4 responses | Transfer · avoid · mitigate · accept |
| Control types | Preventative (stop) · detective (find) |
| BCP vs DR | Premises and people vs IT and infrastructure |
| GDPR | Up to €20m or 4% of global revenue, whichever is higher |
| Credit risk | Loss from counterparty or issuer failing to meet obligations (obligor) |
| Counterparty vs issuer risk | Broker fails to deliver vs bond issuer defaults |
| Settlement vs pre-settlement | One side pays, other does not vs default before settlement (e.g. swap) |
| Systemic risk | Northern Rock spread; Barings (1995) did not |
| Credit exposure | Current + potential future exposure |
| Credit risk premium | Borrowing rate minus default-free rate |
| Grades (S&P style) | Investment AAA to BBB · speculative BB to D |
| UK-nominated agencies | Fitch · Moody's · S&P · DBRS |
| Expected loss | EL = PD × EAD × LGD |
| Recovery rate | RR = 100% − LGD |
| LGD example | $500m loan, $300m loss = 60% |
| EAD | Exposure at default; includes expected further drawdowns |
| Credit event | Bankruptcy, insolvency, missed payment, even a downgrade |
| Wrong way risk | Exposure adversely correlated with counterparty credit quality |
| Non-performing | Usually 90 days late (before that: past due) |
| Credit limits | Borrower · counterparty · connected groups; binding |
| Netting | Legally enforceable offset: £4m and £6m replacement cost fall to £2m and £3m |
| Collateral | Unilateral · bilateral · netted; marked to market |
| CDS | Buyer pays fee; seller pays on credit event on reference entity |
| Securitisation | Originator, issuer (SPV), rated bonds |
| CCP | Clearing house counterparty to both sides; boosts netting |
| Haircut example | $100m shares lent, 3% haircut: $103m collateral |
| Basel roles | Board approves strategy (review at least annually); senior management implements |
| HHI | Sum of squared shares: 50/50 = 50%; 2/98 = 96.08% |
| Credit VaR | $5m at 95% = 5% chance of losing more |
| Market risk | Loss from changes in value of financial instruments |
| Volatility risk | Unusually uncertain prices; options dearer |
| Market liquidity risk | Cannot trade or get a price: lack of supply, demand or market makers |
| Basis risk | Hedge is similar, not identical |
| Interest rate risk | Bond prices move inversely to rates; long bonds move more |
| Commodity risk | Concentrated supply, storage costs, price jumps |
| Currency example | US assets +10%, dollar −8%: about 2% for the investor |
| Hedging | Offsetting position, e.g. buy a put option; trade-off with cost |
| Market risk limit | Stop-loss limit, VaR or absolute amount |
| Diversification | Portfolio SD below weighted average of components |
| Electronic trading / HFT | Small position limits, fast liquidation, low risk per trade |
| Effective function | Independent, escalation, VaR plus stress and scenarios, daily P&L |
| VaR | Maximum loss at a confidence over a period |
| Back testing | Actual daily exposure vs predicted VaR, daily |
| Three VaR approaches | Historical simulation · parametric · Monte Carlo |
| Stress vs scenario | One variable at a time vs several together |
| Mean | Sum ÷ n (7-12% funds: 9.5%) |
| Median | Middle value; even count = average of middle two (12.5) |
| Mode | Most frequent ($100k example) |
| Range / IQR | High minus low (13 − 2 = 11) / Q3 − Q1 |
| Quartile deviation | (Q3 − Q1) ÷ 2 = (83 − 60) ÷ 2 = 11.5 |
| Variance / SD | Mean 7.4%; squared gaps 86.4 ÷ 10 = 8.64; SD = square root |
| Sample SD | Divide by n − 1 |
| Normal distribution | 68.26% / 95.5% / 99.75% within 1 / 2 / 3 SD |
| Correlation | −1 to +1; only +1 removes all diversification benefit |
| Beta | 0 = uncorrelated to market; negative = inverse |
| Nominal return | Not adjusted for inflation |
| Real return (exact) | (1 + real)(1 + inflation) = 1 + nominal: 12% and 8% gives 3.7% |
| Total return | Income + capital gains |
| Holding period return | (Income + gain) ÷ initial value |
| Future value | S = X(1 + r)ⁿ: $10,000, 10%, 4 years = $14,641 |
| Present value | X = S ÷ (1 + r)ⁿ: $14,641 → $10,000 |
| 1980-2011 returns | Equities ~7.8% · corporate bonds ~6.1% · T-bills ~1.6% |
| Equity risk factors | Liquidity · growth · volatility · strategic risk of issuer |
| Seven investment risks | Currency · interest rate · issuer · equity · commodity · property · fund liquidity |
| Two-thirds rule | 9% mean, 4% SD: 5% to 13% two-thirds of the time |
| Beta | Volatility vs market; 1 = in line; 36 monthly points |
| Alpha | Outperformance vs benchmark; can hide fees |
| Sharpe ratio | (Return − risk-free) ÷ standard deviation |
| Information ratio | Mean excess return ÷ tracking error |
| Tracking error | Ex post for reporting · ex ante for control |
| Non-systematic risk | Diversifiable with 15 to 20+ low-correlated stocks |
| Diversify vs hedge | Uncorrelated vs negatively correlated |
| Illiquid assets | Venture capital · private equity · property |
| Short selling | Borrowed stock; loss unlimited |
| Liquidity risk | Not enough cash: insolvency, dear borrowing, fire sales, penalties |
| Northern Rock | Long mortgages funded short; 9 Aug 2007 freeze; nationalised |
| Maturity ladder | Inflows vs outflows by date (day one: 180 − 100 = 80) |
| Asset vs funding liquidity | Sell or pledge assets vs liability-side funding |
| Gap analysis | Net flow per bracket; ignores credit risk, cannot handle options |
| Four asset measures | Bid-offer spread · depth · immediacy · resilience |
| Resilience | Speed prices recover after a large trade |
| Spread ratio | Spread ÷ mid-price; smaller = more liquid |
| Management process | Contractual → normal behaviour → stress → compare to appetite |
| UK regime | ILAA |
| Fund tools | Gates limit redemptions · side pockets block them |
| Three scenarios | Going concern · bank-specific · general market crisis |
| Day-one scenario result | +80 · (40) · (90) |
| LaR | Historic funding distribution at confidence levels |
| Funding sources | Wholesale · securitisation · retail deposits · central bank |
| Netting example | With: $16m inflow · without: $20m outflow |
| Market dislocation | Markets do not clear at any price; deflation risk |
| Model risk | Adverse outcomes from incorrect or misused models |
| Two causes | Fundamental errors · misuse |
| Risk type | An operational risk |
| LTCM | Convergence trades → drift → lost $4.4bn of $4.7bn (1998) |
| Op risk scenario model | Frequency, typical loss, extreme loss; workshop = 1 in 20 (95%) |
| Poisson vs lognormal | How often vs how bad |
| Capital levels | 1 in 200 = 99.5% · 1 in 1,000 = 99.9% |
| Historical simulation | e.g. 500 days; 5th percentile for 95% |
| Governance | Board owns; senior management executes; internal audit assesses |
| Back-testing | Compare output with reality once it catches up |
| Corporate governance | Run in shareholders' long-term interest |
| Risk committee | Ratify policy · monitor · turn appetite into limits |
| Appetite approval | Committee recommends · board approves annually |
| Committee chair | Non-executive director |
| CRO powers | Set business limits, approve excesses within board limits |
| 1st line | Business owns risk |
| 2nd line | Risk and compliance: support and challenge |
| 3rd line | Internal audit: independent assurance |
| BIS Principle 12 (2015) | Disclosure and transparency: 6 topics |
| Moral hazard | Behaving differently when shielded from consequences |
| ERM | All risks, and how they relate to each other |
| Regulatory driver | Basel Pillar 2 (ICAAP) |
| Pillar 2 steps | Define exposure · stress · compare to capital |
| Cultural challenges | Executive sponsor · common language · merging teams |
| Escalation matrix | Incident types vs who is alerted at each severity |
| Aggregation challenges | Measurement · timescales · combining data |
| VaR horizons | Market days · credit and liquidity weeks/months · operational months/years |
| Client risk | No compensation, but fees fall (earnings at risk) |
| ESG | Identify · evaluate · act; horizon at least 10 years |
| GRC | Harmonised risk management; more than software |
| Format | 100 questions · 2 hours |
| Question bank basis | Edition 11 workbook, v12 weights |
| Ch 3 weight | 18 of 100 (heaviest) |
| Ch 4 weight | 16 of 100 |
| Ch 1 weight | 13 of 100 |
| Ch 5 and Ch 6 | 12 and 11 of 100 |
| Ch 7 + 2 + 10 | 8 + 7 + 6 = 21 of 100 |
| Ch 9 + 8 | 5 + 4 = 9 of 100 |
| Formula questions | Real rate, compound interest and PV, EL, haircut, HHI, VaR reading, netting, mean/median/SD |