IOB LBO flashcards

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

EU AI Act high-risk systems

AI used in creditworthiness assessment, employment, education or critical infrastructure is high-risk. Providers must run risk management, data governance, technical documentation, logging, human oversight and conformity assessment before market entry.

Retrieval-augmented generation

A technique where the model retrieves passages from an approved document store and answers using them, reducing hallucination and making sources auditable. It still needs output logging and human review for regulated communications.

Shadow AI

Use of unsanctioned AI tools by staff, often public chatbots, which can expose client data or create unrecorded decisions. Controls include an approved tool inventory, prompt-level data loss prevention and no-training contractual clauses.

Straight-through processing rate

The share of applications completed end to end without manual intervention. It is a core digital onboarding metric alongside step-level drop-off, identity false-positive rate and time to first transaction.

Suitability assessment

The documented test that a recommendation fits a client's objectives, horizon, risk tolerance, capacity for loss and knowledge. The file must show why the specific product was chosen over alternatives.

Risk tolerance versus capacity

Tolerance is willingness to accept volatility; capacity is financial ability to absorb loss without damaging goals. Where they conflict, the portfolio is capped at the lower of the two.

Time-weighted versus money-weighted return

Time-weighted return strips out cash-flow timing and measures manager performance. Money-weighted return, the internal rate of return, reflects the client's actual experience including contribution and withdrawal timing.

Total cost of ownership

The sum of product charges, platform charges, advisory fees and incidental costs, expressed cumulatively in money terms where required. It is broader than the ongoing charges figure, which omits transaction costs.

Net interest margin

Interest income minus interest expense, divided by average earning assets. It is a primary retail banking profitability driver and is sensitive to the shape of the yield curve and deposit repricing.

Deposit beta

The proportion of a policy rate change passed through to customer deposit rates. Current accounts typically have low beta and lag repricing; savings products have higher beta and reprice quickly.

Strong customer authentication

A requirement that electronic payments use at least two independent factors from knowledge, possession and inherence. It underpins fraud controls alongside transaction risk scoring and confirmation of payee.

Liquidity coverage ratio

High-quality liquid assets divided by net cash outflows over thirty days, required to be at least 100%. Retail deposits attract lower run-off factors than wholesale funding because they are more stable.

NAV per share

Total assets minus total liabilities, divided by shares outstanding. Subscriptions and redemptions are executed at the next NAV struck after the order is received, not at a known prior price.

UCITS 5/10/40 rule

A fund may hold up to 10% of net assets in a single issuer, but holdings above 5% may total no more than 40% of net assets. This limits single-name concentration in diversified portfolios.

Tracking difference versus tracking error

Tracking difference is the fund return minus the index return, a level. Tracking error is the standard deviation of that difference, a volatility measure. Both matter when judging index funds.

Information ratio

Active return divided by tracking error. It measures how much excess return a manager generates per unit of active risk taken, allowing comparison across strategies with different benchmark-relative risk.

Three lines model

The first line owns and manages risk, the second provides oversight, challenge and frameworks, and internal audit gives independent assurance. The model separates risk-taking from risk-monitoring to avoid conflicts.

Residual risk rating

Inherent risk after applying control effectiveness. Compliance programmes rate products, clients, geography and channels for inherent risk, then assess controls to set monitoring frequency and testing depth.

Key risk indicator design

A KRI must be forward-looking, linked to a specific risk driver, have defined green, amber and red thresholds, and a named owner obliged to act when a threshold is breached.

Debt service coverage ratio

Net operating income divided by total debt service. A covenant of 1.20x means cash flow covers debt payments with a 20% cushion before the borrower breaches and triggers waiver discussions.

Expected loss formula

Expected loss equals probability of default times loss given default times exposure at default. Pricing must cover this expected loss plus operating cost and a risk-adjusted return on capital.

Loan-to-value ratio

Loan amount divided by appraised property value. Higher LTV increases loss given default, so lenders price for it, require mortgage insurance or cap the maximum advance.

Population stability index

A credit scorecard monitoring metric comparing the distribution of borrowers over time or against a development sample. Material drift signals a need to recalibrate the model, not just adjust cut-offs.

Value at Risk

A loss threshold not expected to be exceeded at a given confidence level over a set horizon, such as one-day 99% VaR. It says nothing about loss severity beyond that threshold.

Expected shortfall

The average loss in the tail beyond the VaR threshold. Basel adopted it at 97.5% confidence because it captures tail severity and is sub-additive, unlike VaR.

Reverse stress testing

A technique that starts from a defined failure point, such as insolvency or breach of minimum capital, and works backwards to identify which scenarios would cause it. It exposes hidden vulnerabilities.

Net stable funding ratio

Available stable funding divided by required stable funding over a one-year horizon, required to be at least 100%. It addresses structural funding mismatch rather than short-term liquidity survival.

Double materiality

Reporting both how sustainability matters affect enterprise value and how the company affects people and the environment. Regimes such as the CSRD require this two-way assessment.

SFDR Article 8 versus Article 9

Article 8 products promote environmental or social characteristics; Article 9 products have sustainable investment as their objective. Classification drives pre-contractual and periodic disclosure obligations.

EU Taxonomy alignment

An activity qualifies only if it substantially contributes to one environmental objective, does no significant harm to the others, and meets minimum social safeguards. All three tests must be evidenced.

PCAF financed emissions

Outstanding amount divided by total company equity plus debt, multiplied by the borrower's emissions. Results are reported in tonnes of carbon dioxide equivalent per unit of financed amount.

Greenwashing controls

Pre-approval of every sustainability claim, a substantiation file per claim, consistent use of defined terms, and compliance with product naming rules. Marketing and investment teams share accountability.

Scope 3 emissions

Indirect value-chain emissions, including purchased goods and use of sold products. For banks and asset managers, financed emissions within Scope 3 usually dominate the total footprint.