CrTAS flashcards

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

Three lines model

First line owns and manages risk, second line provides oversight, frameworks, and challenge, third line gives independent assurance. This structure separates risk-taking from risk oversight to avoid conflicts.

Risk appetite vs risk capacity

Risk appetite is the amount and type of risk the firm chooses to accept, expressed in limits and tolerances. Risk capacity is the maximum risk it can bear before breaching capital, liquidity, or regulatory constraints.

Residual risk

The risk remaining after existing controls have been applied. It is compared with the risk appetite, and any excess requires additional treatment, transfer, or acceptance with documented sign-off.

Key risk indicator

A measurable, forward-looking metric with defined amber and red thresholds, an assigned owner, and a pre-agreed escalation action. It signals rising risk before losses appear.

Segregation of duties

A control requiring that initiation, approval, execution, and reconciliation of a transaction are performed by different people, preventing one individual from completing and concealing an error or fraud.

Parametric VaR formula

For normal returns, VaR = -(mean - z times standard deviation) times portfolio value, where z is 1.645 at 95% and 2.326 at 99% confidence. It assumes linear exposures and stable volatility.

Expected shortfall

The average loss conditional on losses exceeding the VaR threshold. It is a coherent risk measure that captures tail severity and is subadditive, unlike VaR, which can increase when portfolios are combined.

Historical simulation VaR

A method that applies historical factor returns to the current portfolio and ranks the resulting P&L. It makes no distributional assumption but cannot produce losses beyond those in the lookback window.

VaR backtesting traffic light

A Basel framework counting VaR exceptions over 250 trading days. Zero to four exceptions is green, five to nine amber, ten or more red, with the capital multiplier rising from three toward four.

DV01

The change in a bond or portfolio value for a one basis point parallel shift in yields. It converts yield volatility into a monetary risk measure and is additive across positions with the same curve.

Expected loss formula

Expected loss equals probability of default times loss given default times exposure at default. It represents the long-run average credit cost, priced into spreads and covered by loan-loss provisions.

Merton structural model

A credit model treating equity as a call option on firm assets with debt as the strike. Default occurs at maturity if asset value falls below the debt barrier, so leverage and asset volatility drive default probability.

Potential future exposure

A high-confidence estimate, often 95% or 99%, of the maximum positive mark-to-market exposure to a counterparty over a future horizon. It sets counterparty credit limits alongside current exposure.

Credit valuation adjustment

The market value of expected loss from counterparty default on derivatives. It increases with counterparty default probability, expected exposure, and correlation between exposure and default.

Wrong-way risk

A condition where exposure to a counterparty increases as its credit quality deteriorates, for example collateral in its own stock. It requires specific limits, collateral terms, or capital add-ons.

Close-out netting

A contractual arrangement allowing positive and negative mark-to-market positions with one counterparty to be offset on default. Exposure is reduced only if the agreement is legally enforceable in relevant jurisdictions.

Liquidity coverage ratio

High-quality liquid assets divided by net cash outflows over a 30-day stress, with a 100% minimum. HQLA is tiered into Level 1, 2A, and 2B with haircuts and composition caps.

Net stable funding ratio

Available stable funding divided by required stable funding, minimum 100%. It discourages funding long-dated or illiquid assets with short-term wholesale liabilities, complementing the liquidity coverage ratio.

Repricing gap

Rate-sensitive assets minus rate-sensitive liabilities within a time bucket. Change in net interest income approximately equals the gap multiplied by the change in interest rates.

Duration gap

Asset duration minus the ratio of liabilities to assets times liability duration. A positive gap means equity value falls when interest rates rise, the basis for economic value of equity sensitivity.

Contingency funding plan

A documented playbook with early-warning indicators, escalation roles, a menu of funding actions, and a liquidity buffer sized to survive a combined idiosyncratic and market stress.

Operational risk definition

The risk of loss from inadequate or failed internal processes, people, systems, or external events. The Basel definition excludes strategic and reputational risk from this category.

Model risk

The risk of adverse consequences from decisions based on incorrect or misused model outputs. It is managed through inventory, tiering, independent validation, approved-use statements, and ongoing monitoring.

Model validation scope

Independent assessment of conceptual soundness, data quality, implementation accuracy, outcomes analysis such as backtesting and benchmarking, and documented limitations with compensating controls for each model.

Compliance obligation register

A catalogue mapping each applicable rule to the responsible owner, the control that satisfies it, and the effective date. It supports monitoring, testing, and regulatory change management.

Intraday liquidity monitoring

Tracking real-time settlement obligations against available balances, incoming payments, and central bank collateral capacity to avoid failing time-critical payments during the business day.

ISO 20022 payment messages

A messaging standard using named fields, with pacs.008 for customer credit transfers, pacs.009 for bank transfers, and camt.053 for statements. It replaces equivalent SWIFT MT messages.

Three-way reconciliation

Matching the trade record, the counterparty confirmation, and the settlement or custody record. Unresolved breaks are aged and escalated against defined thresholds to prevent loss.

Payment fraud call-back control

Verification of new or changed payment instructions by calling a known, independently sourced telephone number. It defeats email compromise and vendor impersonation fraud.

Collateral haircut

A percentage reduction applied to the market value of pledged collateral, reflecting price volatility, liquidation horizon, and currency mismatch. It protects the secured party against collateral value decline.

Reverse stress testing

A technique that starts from a defined adverse outcome, such as capital or liquidity failure, and identifies scenarios that would cause it. It exposes vulnerabilities that forward scenarios may miss.

Leverage ratio

Tier 1 capital divided by the total exposure measure, including on- and off-balance-sheet items, with a minimum around 3%. It constrains balance-sheet growth when risk weights are low.

Capital buffers

Layers added above minimum capital requirements: the capital conservation buffer, the countercyclical buffer, and systemic institution surcharges. Breaching them restricts dividend and bonus distributions.