GARP Updated 2016-FRR Exam Questions and Answers by benji

Comprehensive and Detailed In-Depth Explanation:

The Basel I Accord, introduced in 1988 by the BCBS, focused primarily on credit risk, establishing a standardized framework for capital requirements to cover potential losses from borrowers’ defaults. It introduced risk-weighted assets (RWA) with specific weights (e.g., 0% for OECD government bonds, 100% for corporate loans) and required banks to hold a minimum capital ratio of 8% against credit risk exposures. Market risk was not addressed until the 1996 Amendment to Basel I, operational risk was introduced in Basel II (2004), and liquidity risk became a focus in Basel III (2010). Thus, Basel I’s original scope was limited to credit risk.

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."

Identify the strategies for achieving leverage in long positions:

I. Securities may be purchased with borrowed funds using a bank loan from the broker.

This is a common method known as margin trading, where an investor borrows money from a broker to purchase securities.

II. Securities may be borrowed on margin by taking a loan from a broker.

This is another form of margin trading where the securities themselves are used as collateral for the loan.

III. Securities may be purchased and used in a repo transaction to generate cash for further security purchases.

In a repurchase agreement (repo), securities are sold with an agreement to buy them back at a later date, providing immediate liquidity for further investments.

IV. The bank may enter into a derivative transaction, such as a total return swap, that requires little to no collateral but mimics the performance of a long or short position in the underlying instrument.

Derivatives like total return swaps allow for exposure to the performance of an asset without owning it, often with minimal collateral requirements.

Explanation:

All the listed strategies (I, II, III, IV) are valid methods for a bank to achieve leverage in long positions. They involve different mechanisms of borrowing funds or utilizing existing assets to increase the potential return on investment.

Consortium databases in the context of operational risk management:

Gather loss data from multiple firms to provide a comprehensive view of industry-wide risk events.

Contain anonymous information to protect the identities of the contributing firms while still providing valuable risk data. They do not gather information from news articles, use data only from the top 5% of the industry, or specifically map risk categories with causes.