CISI Risk in Financial Services flashcards

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

Risk

The combination of the probability of an event and its consequences. In financial firms consequences are usually monetary losses, capital depletion or reputational damage affecting objectives.

Pure versus speculative risk

Pure risk offers only loss or no loss, such as fire or fraud. Speculative risk offers gain or loss, such as trading positions. Firms manage both but capital buffers mainly address downside outcomes.

Risk appetite

The amount and type of risk an organisation is willing to accept in pursuit of its objectives, expressed in qualitative statements and quantitative limits approved by the board.

Risk tolerance

The acceptable variation or deviation around the stated risk appetite for a particular risk type, often expressed as limits or thresholds that trigger escalation when breached.

Three lines of defence

Business units own and manage risk, risk and compliance functions oversee and challenge, internal audit gives independent assurance to the board. This structure clarifies accountability across the firm.

Risk register

A record of identified risks showing owner, likelihood, impact, existing controls, residual rating and review date. It connects the risk framework to day-to-day management decisions.

Expected loss formula

Expected loss equals probability of default multiplied by exposure at default multiplied by loss given default. Provisions and pricing should cover expected loss; capital covers unexpected loss.

Systematic versus unsystematic risk

Systematic risk is market-wide and cannot be diversified away. Unsystematic risk is specific to a firm or sector and can be reduced by holding a diversified portfolio.

Board risk responsibilities

The board sets strategy and risk appetite, approves the risk framework, appoints senior management and oversees internal control, remuneration and reporting of material risks.

Independent non-executive director

A director free of material business, employment, family or advisory relationships with the firm, its executives or auditors, able to challenge management objectively in board decisions.

Audit committee

A board committee of independent non-executive directors overseeing financial reporting, external audit, internal audit independence and internal control, meeting auditors without executive management present.

Risk committee

A board committee overseeing risk appetite, the risk framework and senior risk appointments. The chief risk officer should have direct access to it and to the full board.

Remuneration and risk alignment

Pay structures use deferral, malus and clawback so bonuses can be reduced or recovered after poor risk outcomes, aligning incentives with prudent long-term risk-taking.

Comply or explain

A governance code approach allowing firms to depart from a provision provided they explain why. Apply and explain codes instead require explanation of how principles are applied.

Senior managers regime

A framework making named individuals personally accountable for defined areas of responsibility, supported by a responsibilities map and certification of fitness and propriety.

Whistleblowing controls

Protected disclosure channels, anti-retaliation safeguards and reporting to the board or audit committee on concerns raised, enabling staff to report misconduct safely.

Separation of chair and CEO

Splitting the chair and chief executive roles prevents concentration of power. Many codes also require that the chair was not previously chief executive of the same firm.

Regulatory objectives

Financial regulation aims to protect consumers, maintain market confidence and integrity, reduce financial crime and promote stability. Prudential rules target firm safety; conduct rules target customer outcomes.

Basel III capital minimums

Common Equity Tier 1 at 4.5%, Tier 1 at 6% and total capital at 8% of risk-weighted assets, before conservation, countercyclical and systemic buffers are added.

Liquidity coverage ratio

High-quality liquid assets must cover 30 days of net stressed cash outflows. It addresses short-term liquidity risk, complementing capital rules that address solvency.

Net stable funding ratio

Available stable funding must exceed required stable funding over a one-year horizon, limiting reliance on short-term wholesale funding for long-term assets.

Risk-weighted assets

Exposures multiplied by regulatory risk weights under standardised or internal-model approaches, forming the denominator of capital ratios for credit, market and operational risk.

Customer due diligence

Identifying customers and beneficial owners, verifying identity, understanding purpose and expected activity, and conducting enhanced checks for politically exposed persons and high-risk jurisdictions.

Recovery and resolution planning

Recovery plans restore a failing firm; resolution plans enable orderly wind-down without taxpayer support. Bail-in writes down or converts liabilities to absorb losses.

Deposit protection scheme

A scheme reimbursing eligible depositors up to a set limit if a bank fails, supporting confidence and reducing contagion risk from bank runs.

Credit risk

The risk of loss because a counterparty fails to meet contractual obligations. It arises in lending, bonds, derivatives, settlement and trade finance exposures.

Five Cs of credit

Character, capacity, capital, collateral and conditions. A qualitative framework used alongside quantitative scoring to assess whether a borrower can and will repay.

Probability of default

The likelihood that a borrower defaults within a stated horizon, commonly one year. It is a key input to expected loss, pricing and regulatory capital calculations.

Loss given default

The percentage of exposure not recovered after default, reflecting collateral, seniority and workout costs. It combines with probability of default and exposure at default to give expected loss.

Credit risk mitigation

Collateral, guarantees, credit derivatives or netting that reduce credit exposure. Only legally certain and enforceable mitigants reduce regulatory capital requirements.

Wrong-way risk

Arises when exposure to a counterparty increases as that counterparty's credit quality deteriorates, so potential losses are larger than standard models assume.

Value at risk

An estimate of the maximum loss over a set horizon at a confidence level. A 99% one-day VaR of 5 million implies losses exceed 5 million on about one day in a hundred.

Expected shortfall

The average loss in outcomes beyond the value at risk threshold. It captures tail severity that VaR ignores and is used at 97.5% confidence in Basel market risk rules.