Pass the GARP Financial Risk and Regulation 2016-FRR Questions and answers with CertsForce

When Alpha Bank completes a foreign exchange matched transaction, it buys Brazilian reals in the market immediately after selling them to the customer, thus matching the position. This process eliminates market risk as the bank is no longer exposed to fluctuations in the exchange rate between the Australian dollar and the Brazilian real.

Customer Transaction:

Alpha Bank sells BRL 100 million to the customer and receives AUD 1,010,000.

Market Transaction:

Alpha Bank immediately buys BRL 100 million in the market at the rate of 100, paying AUD 1,000,000.

By matching its position, the bank ensures that it is not exposed to changes in the exchange rate, thereby eliminating market risk.

References

Source: How Finance Works​

Option A:A company can have differing operational loss data collection and reporting thresholds for different departments.

Verified and correct. Different departments might have various risk exposures and thresholds based on their specific operational risk profiles.

Option B:The operational loss data collection program has to capture all losses regardless of their size.

Incorrect. A minimal loss threshold is usually set to avoid the administrative burden of capturing immaterial losses. Companies typically set thresholds based on risk appetite and regulatory requirements.

Option C:Setting an operational loss data collection threshold depends on the risk appetite of the firm and regulatory requirements it needs to meet.

Verified and correct. Thresholds are set based on the company's risk appetite and regulatory expectations to ensure effective and efficient loss data collection.

Option D:The operational loss data collection program must include all material losses that are above the minimal gross loss threshold.

Verified and correct. Only losses above the set threshold are required to be captured to maintain a focus on material risks.

Given that BetaFin does not have retail branches and operates in fixed income, equity, and asset management divisions, the RCSA workshop approach is the best fit. This approach allows for interactive discussions among experts from different divisions, facilitating a deeper understanding of the operational risks specific to each division.

The Sarbanes-Oxley Act includes risk and control requirements for financial statements in the United States. It mandates strict reforms to improve financial disclosures from corporations and prevent accounting fraud. This Act directly impacts operational risk management by setting standards for all U.S. public company boards, management, and public accounting firms.

Stabilizing Net Income in Volatile Interest Environments:

Shifting from interest rate-sensitive sources to less sensitive sources is the key strategy to stabilize income.

Strategies:

Charging bank fees for underwriting loans: Generates fee income, which is less sensitive to interest rates.

Providing trust, asset management, and trading services: Fee-based services and trading revenue are less sensitive to interest rates.

Extending different types of credit: This strategy can diversify risk but does not directly reduce interest rate sensitivity.

Incorrect Strategy:

Originate more floating interest rate loans: This increases sensitivity to interest rate changes, opposite of the desired stabilization goal.

References

Source: How Finance Works​

A matched book strategy involves matching every position with an offsetting position, effectively minimizing market risk. This strategy ensures that the bank's exposure to market fluctuations is neutralized, which is ideal for limiting risk exposure.

Comprehensive and Detailed In-Depth Explanation:

Risk appetite matures as an operational risk program evolves because management gains clarity on acceptable loss levels through data collection, scenario analysis, and control assessments under Basel II’s AMA. Option C reflects this learning process. Option A (comparison with peers) is secondary, Option B (lowering appetite) isn’t a universal outcome, and Option D (increased appetite from controls) assumes a specific direction not guaranteed by maturity.

Exact Extract from Official Source:

BCBS, "Basel II: International Convergence of Capital Measurement and Capital Standards," June 2006, para. 646: "As operational risk management matures, banks develop a clearer understanding of their risk appetite, reflecting the acceptable level of losses based on historical data and risk mitigation capabilities."

GARP FRR Study Notes, Operational Risk Section: "A maturing operational risk program enhances management’s ability to define risk appetite by quantifying tolerable loss levels through improved risk assessment processes."

Earnings-at-risk stress testing evaluates the bank's earnings sensitivity. This method assesses how changes in economic conditions or other risk factors might impact the bank’s earnings, providing insights into the potential volatility in profitability.

Net Interest Income Calculation:

As previously calculated, the net interest income is $9 million per year.

Present Value of Perpetuity Formula:

Present Value (PV) = Net Interest Income / Discount Rate

PV = $9 million / 0.05 = $180 million

Correction:

The net interest income was stated as $9 million earlier, but here, let's verify this calculation:

Interest income from $120 million at 10% = $12 million

Interest expense on $100 million at 3% = $3 million

Net interest income = $12 million - $3 million = $9 million

Correct Present Value Calculation:

PV = $9 million / 0.05 = $180 million

Final Verification:

The previous net interest income used is correct and the final PV calculation should stand corrected as per the perpetual formula:

PV = $9 million / 0.05 = $180 million, confirming the right choice should be $180 million.

References

Source: How Finance Works​

Treasury Functions:

Management of Assets and Liabilities: Treasury functions include managing the bank's balance sheet, which involves optimizing the mix of assets and liabilities.

Management of Liquidity: Ensuring the bank has sufficient liquidity to meet its obligations.

Management of Capital: Overseeing the capital adequacy to meet regulatory requirements and support the bank's operations and growth.

Performance Estimates:

Estimating and managing the bank’s performance involves various departments, not typically the treasury function. Performance estimates would be more related to financial planning and analysis functions.

References

Source: How Finance Works​