IFMP Risk Management Certification (RMC), Pakistan flashcards

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

Pure versus speculative risk

Pure risk offers only loss or no loss, such as fire; speculative risk offers gain or loss, such as trading. ERM covers both types.

Risk management process

The iterative process identifies, assesses, treats, monitors, and reports risk. It links objectives, risk appetite, controls, and review so that risk decisions stay current.

Systematic versus unsystematic risk

Systematic risk affects broad markets and cannot be diversified away; unsystematic risk is firm-specific and can be reduced by diversification. Investors are compensated mainly for systematic risk.

RAROC formula

RAROC equals risk-adjusted return divided by economic capital. Risk-adjusted return deducts expected loss and funding costs; economic capital covers unexpected loss at a chosen confidence level.

Three lines model

First line business owns and manages risk; second line risk and compliance provide independent oversight; third line internal audit gives independent assurance to the board. Independence is essential.

Board risk committee

A board-level committee approves risk appetite, oversees ERM, reviews material risks and breaches, and challenges management. It should include independent directors with relevant financial risk expertise.

Chief Risk Officer independence

The CRO leads the independent risk function, reports to the board or its risk committee, and has unrestricted access to the board. Independence from revenue lines prevents conflicts.

Risk culture

Risk culture is the shared values and behaviours that shape risk decisions. It includes tone at the top, accountability, escalation, challenge, and incentives aligned with prudent risk-taking.

Risk capacity versus appetite

Risk capacity is the maximum risk the institution can bear before breaching obligations; risk appetite is the risk it chooses to accept. Appetite should be lower than capacity.

Risk appetite statement

A board-approved statement defines the nature and amount of risk acceptable in pursuit of strategy. It combines qualitative principles with quantitative metrics, tolerances, and limits.

Risk register contents

A risk register records risk description, root cause, owner, likelihood, impact, controls, and residual rating. It supports monitoring, reporting, and prioritization of risk actions.

Parametric VaR formula

Parametric VaR equals z-score times portfolio volatility times portfolio value for the chosen horizon. It assumes normally distributed returns and stable correlations; the z-score reflects confidence.

Duration price approximation

For a small yield change, percentage price change approximates minus duration times yield change. Convexity adds a second-order term, improving estimates for larger yield moves.

Expected shortfall

Expected shortfall is the average loss conditional on losses exceeding VaR. Unlike VaR, it captures tail severity and is subadditive, so it is a coherent risk measure.

FX net open position

A bank's net open position is assets minus liabilities plus off-balance-sheet commitments in each foreign currency, converted to base currency. It measures directional FX exposure.

Expected loss formula

Expected loss equals probability of default times loss given default times exposure at default. LGD equals one minus recovery rate. Provisions and pricing should cover expected loss.

Five Cs of credit

Character, capacity, capital, collateral, and conditions are traditional credit assessment factors. They assess borrower integrity, repayment ability, financial strength, security, and economic environment.

Credit concentration risk

Concentration risk arises from large exposures to a single borrower, group, sector, or country. Limits and diversification reduce potential losses from correlated defaults.

IFRS 9 ECL stages

Stage 1 covers performing exposures with 12-month expected credit losses. Stages 2 and 3 use lifetime ECL when credit risk increases significantly or the asset is credit-impaired.

Operational risk definition

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

RCSA

Risk and control self-assessment is a structured process where business units identify risks, assess inherent and residual risk, and evaluate control effectiveness. Results feed risk registers and action plans.

Business impact analysis

A BIA identifies critical business processes, dependencies, recovery time objectives, and recovery point objectives. It underpins business continuity planning and operational resilience.

Liquidity coverage ratio

LCR equals high-quality liquid assets divided by net cash outflows over a 30-day stress period. Basel requires a minimum of 100%, with inflows capped at 75% of outflows.

Net stable funding ratio

NSFR equals available stable funding divided by required stable funding over a one-year horizon. It limits excessive reliance on short-term wholesale funding; the Basel minimum is 100%.

Funding versus market liquidity

Funding liquidity is the ability to meet cash obligations as they fall due; market liquidity is the ability to trade assets without large price concessions. Both can deteriorate together in stress.

VaR interpretation

Value at Risk estimates the maximum loss at a given confidence level over a set horizon. A 99% one-day VaR of PKR 10 million means losses exceed it on about 1% of days.

Historical VaR

Historical VaR revalues the current portfolio using historical return observations and takes the appropriate percentile. It does not assume normality but depends on the historical window.

Backtesting VaR

Backtesting compares actual losses with VaR forecasts and counts exceptions. Basel's traffic-light approach uses 250 trading days; too many exceptions indicate model weakness and higher capital.

Reverse stress testing

Reverse stress testing starts from a specified severe outcome, such as insolvency or capital breach, and identifies scenarios that could cause it. It exposes hidden vulnerabilities.

Basel III CET1 minimum

Basel III sets minimum common equity tier 1 capital at 4.5% of risk-weighted assets, tier 1 at 6%, and total capital at 8%. A 2.5% conservation buffer applies.

Pakistan banking regulator

The State Bank of Pakistan regulates banks and development finance institutions, issues Prudential Regulations, and supervises Basel III implementation. SECP regulates non-bank financial companies and capital markets.

ICAAP

The Internal Capital Adequacy Assessment Process requires a bank to assess material risks, project capital needs under stress, and set internal capital targets. Supervisors review it.