BRP flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Expected Loss formula

Expected loss equals probability of default multiplied by loss given default multiplied by exposure at default. It represents the long-run average credit loss and is normally covered by pricing and provisions.

Loss Given Default

The share of exposure not recovered after a default, equal to one minus the recovery rate. It depends on collateral, seniority, and workout costs, and rises during downturns.

Point-in-time versus through-the-cycle PD

Point-in-time PD reflects current economic conditions and is volatile. Through-the-cycle PD averages across the cycle and is more stable, making it suitable for regulatory capital.

Credit conversion factor

The percentage of an undrawn commitment expected to be drawn down before default. It converts off-balance-sheet exposure into an exposure at default equivalent.

Wrong-way risk

A condition where exposure to a counterparty increases as the counterparty's creditworthiness deteriorates. It makes default more likely exactly when losses would be largest.

Credit valuation adjustment

The market value of counterparty credit risk on derivative positions. It is the difference between the risk-free value and the value accounting for possible counterparty default.

Standardised approach risk weights

Regulatory risk weights applied to exposure classes, often based on external credit ratings. They convert exposure amounts into risk-weighted assets without internal models.

Value at Risk

The maximum loss not exceeded with a given probability over a defined holding period. It ignores the magnitude of losses beyond the threshold and is not sub-additive.

Expected shortfall

The average loss conditional on losses exceeding the VaR threshold. It is coherent and sub-additive, capturing tail severity that VaR omits.

Parametric VaR formula

VaR equals the z-score for the confidence level multiplied by portfolio volatility, scaled by the square root of the holding period and the portfolio value.

Delta and gamma

Delta is the first-order change in option value for a unit change in the underlying. Gamma is the rate of change of delta, measuring convexity of the position.

Vega and theta

Vega measures sensitivity of option value to implied volatility. Theta measures the change in value as time to expiry shortens, usually negative for long options.

Historical simulation VaR

VaR computed by revaluing the current portfolio under historical return scenarios. It captures fat tails and non-normality but depends heavily on the chosen window.

VaR backtesting zones

Basel classifies backtesting exceptions over 250 days into green, yellow, and red zones. More than four exceptions triggers a higher capital multiplier.

FRTB expected shortfall

Basel's Fundamental Review of the Trading Book replaces 99% ten-day VaR with 97.5% expected shortfall and adds a non-modellable risk factor charge.

Interest rate risk in banking book

Risk to earnings and economic value from interest rate changes. It is measured with repricing gaps, duration gaps, and supervisory rate shock scenarios.

Operational risk definition

Basel defines it as loss from inadequate or failed internal processes, people, systems, or external events. It explicitly excludes strategic and reputational risk.

Seven operational risk event types

Internal fraud, external fraud, employment practices, clients and business practices, damage to physical assets, business disruption and system failures, and execution and process management.

Business indicator component

Under the Standardised Approach, the business indicator is multiplied by marginal coefficients of 12, 15, or 18 percent depending on the bucket, producing the business indicator component.

Internal loss multiplier

A factor scaling the business indicator component by the ratio of average annual losses to the business indicator component. It rewards lower historical loss experience.

Basic indicator approach

Operational risk capital equals 15 percent of average annual gross income over the previous three years, counting only years with positive income.

Key risk indicators

Forward-looking metrics with defined thresholds that signal rising operational risk. Breaching a threshold triggers escalation before losses occur.

Risk and control self-assessment

A structured process where business units identify process risks, rate inherent and residual risk, and assess control effectiveness to build the risk register.

Loss distribution approach

An actuarial method modelling loss frequency and severity separately, then combining them by convolution or simulation to derive the aggregate loss distribution.

Basel III capital minimums

Minimum ratios are 4.5 percent common equity tier 1, 6 percent tier 1, and 8 percent total capital, all measured against risk-weighted assets.

Capital buffers

On top of minimums, banks hold a 2.5 percent conservation buffer, a countercyclical buffer of up to 2.5 percent, and a G-SIB surcharge.

Leverage ratio

Tier 1 capital divided by the total exposure measure, with a minimum of 3 percent. It provides a non-risk-weighted backstop to risk-based capital.

Liquidity coverage ratio

High-quality liquid assets divided by net cash outflows over a 30-day stress period. The minimum requirement is 100 percent.

Net stable funding ratio

Available stable funding divided by required stable funding over a one-year horizon. It must be at least 100 percent to limit structural funding mismatch.

Large exposure limit

Exposure to a single counterparty must not exceed 25 percent of tier 1 capital, tightened to 10 percent between globally systemically important banks.

Three lines of defence

Business units own and manage risk, risk and compliance functions provide oversight, and internal audit gives independent assurance to the board.

Compliance risk

The risk of legal or regulatory sanctions, material financial loss, or reputational damage from failing to comply with applicable laws and regulations.