BRP common mistakes
BRP · Understand the traps and how to avoid them.
Calculating expected loss as PD x LGD only, omitting EAD, or treating the loss-given-default as a percentage of the loan's original balance regardless of drawn amount.
Candidates memorize the EL = PD x LGD x EAD formula as three letters but practice it on fully drawn term loans, so the exposure-at-default term becomes invisible and gets dropped under time pressure.
What to do instead
Before any EL computation, write down each of the three inputs explicitly with units, and for revolving or partially drawn facilities compute EAD as drawn balance plus a credit conversion factor times the undrawn commitment. Do three practice problems with off-balance-sheet exposure and a 12-month vs lifetime PD distinction.
Reading a credit rating migration or default-rate question and reporting the unconditional through-the-cycle default rate when the item asks for a point-in-time or conditional rate, or vice versa.
Both numbers appear in the same study material and both look like 'the default rate'; the stem's phrasing (current economic conditions, stressed scenario) is skimmed rather than parsed.
What to do instead
Underline the time horizon and conditioning words in the stem before selecting an answer. Build a one-page contrast sheet listing through-the-cycle vs point-in-time, conditional vs unconditional, and which regulatory or accounting context (IRB capital vs IFRS 9 staging) uses each.
Computing Value-at-Risk and then interpreting it as the maximum possible loss, or adding VaR figures across desks by simple summation instead of applying the square-root-of-time or correlation adjustment.
The single-number output of VaR is psychologically satisfying and the confidence level gets conflated with a hard cap; aggregation rules are learned as formulas without the diversification intuition behind them.
What to do instead
For every VaR answer, state the confidence level, horizon, and the phrase 'losses exceed this amount with probability 1 minus the confidence level'. Practice converting 1-day to 10-day VaR and aggregating two positions with correlation 0, 0.5, and 1 so the subadditivity point becomes concrete.
Mixing up the sign and direction of duration and convexity effects, or applying modified duration to a large parallel shift without the second-order correction.
Price-yield inverse relationship is understood qualitatively, but the arithmetic sign convention (price change is negative for positive duration times yield increase) is fumbled in multi-step calculations.
What to do instead
Write the approximation as delta-P/P = -D_mod x delta-y + 0.5 x C x (delta-y)^2 and plug in a 200bp shock both with and without the convexity term. Check the sign of every intermediate result against the intuition that rates up means prices down.
Treating operational risk capital as a simple percentage of gross income under the current standardized approach, ignoring the business indicator component and internal loss multiplier structure.
Older study habits and legacy Basel II material anchor on the basic indicator approach, and the newer business indicator definitions are easy to skim because they look like accounting detail.
What to do instead
Rebuild the standardized approach formula from scratch: business indicator, marginal coefficients by bucket, business indicator component, loss component, and the internal loss multiplier cap. Do one full numeric example for a bank straddling a bucket boundary.
Classifying a scenario as a near-miss, an internal loss event, or an external loss event inconsistently, or booking a control failure with no financial impact as a loss.
The taxonomy overlaps in practice and candidates rely on gut feel rather than the defining criteria (actual loss vs potential loss, boundary of the firm).
What to do instead
Memorize the decision tree: did money move, was it inside the firm, was the control designed to prevent it. Run ten short vignettes through the tree and note which category each lands in and why, including the near-miss branch.
Answering a capital adequacy question by comparing the CET1 ratio to the minimum alone, forgetting the capital conservation buffer, countercyclical buffer, and G-SIB surcharge that stack on top.
The headline 4.5 percent figure is the most rehearsed number, and buffer add-ons are treated as separate trivia rather than as a combined requirement.
What to do instead
For each capital question, build a small stack: minimum, conservation buffer, countercyclical buffer, systemic surcharge, Pillar 2 add-on, then compare. Practice one example where the bank meets the minimum but breaches the combined buffer and identify the distribution restrictions that follow.
Confusing the liquidity coverage ratio with the net stable funding ratio in a stem, applying a 30-day stress horizon to a one-year funding question or vice versa.
Both are short acronyms about liquidity with similar-sounding definitions, and the time horizon is buried mid-sentence.
What to do instead
Anchor each ratio to its horizon and its numerator/denominator pair: LCR is high-quality liquid assets over 30-day net cash outflows; NSFR is available stable funding over required stable funding at one year. Recite the pair aloud before answering any liquidity item.
Applying a regulatory rule without checking its effective date or jurisdictional implementation, so a question about a bank's current obligation is answered with a phase-in schedule or a superseded standard.
Study notes compress several years of reforms into one list, and candidates memorize content without the timeline attached.
What to do instead
Keep a dated timeline of each major standard with implementation dates and note where national discretions exist. When a stem gives a specific year, scan the timeline first and eliminate any rule not yet in force at that date.
Skipping the qualitative judgment items (governance, risk culture, three lines of defense) and spending all remaining time on calculation drills, then guessing on those items.
Quantitative problems feel more trainable and give clearer feedback, so candidates over-invest there and under-prepare the conceptual items that make up a large share of the exam.
What to do instead
Allocate a fixed block each study session to qualitative topics and practice justifying an answer in one sentence using the underlying principle (accountability, independence, escalation). Review the three lines of defense roles and board risk committee responsibilities until each can be explained without notes.