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BFM MODULE - B
Top MCQs (PART-I)

What we will study?

*High priority MCQs of Module B?
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Ques 1: As per RBI Master Direction on Securitization, Banks
securitizing their loan portfolio have to keep a certain portion with
themselves as Minimum Retention Requirement (MRR). For
underlying loans with original maturity of 24 months or less, the
MRR shall be ------ of the loans being securitized.?
a. 10% of the book value. b. 5% of the book value.
c. 5% of the market value. d. 10% of the market value.

1. For underlying loans with original maturity of 24 months or less,

the MRR shall be 5% of the book value of the loans being
securitized.
2. For underlying loans with original maturity of more than 24
months as well as loans with bullet repayments, the MRR shall be
10% of the book value of the loans being securitized.
3. In the case of residential mortgage-backed securities, the MRR
for the originator shall be 5% of the book value of the loans being
securitized, irrespective of the original maturity.

COSO: Committee of Sponsoring Organizations of the Treadway

Commission.
COP: Conference of the Parties.
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Ques 2: Banks have identified and started adapting the Enterprise
Risk Management (ERM) Framework released by?
a. COSO. b. BASEL III.
d. RBI. c. COP 27.

Ques 3: Enterprise Risk Management (ERM) Framework is

structured around Eight key components and Four key objectives
of business. Which of the following is not one such objective of
ERM Framework?
a. Vigilance. b. Strategic.
c. Operations. d. Reporting.

Four key objectives of business under ERM Framework viz.

strategic, operations, reporting and compliance.
Eight key components of ERM Framework viz Internal
Environment, Objective setting, Risk Assessment, Risk response,
Control Activities, Information, Communication, Monitoring.
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Ques 4: Since Basel II norms could not help save the financial
institutions or avoid occurrence of sub-prime crisis, BCBS has to
come out with next standards, Basel III guidelines in the year 2010.
Basel-III has tried sincerely to plug the loopholes of Basel-II
guidelines in -------- different ways?
a. One. b. Four.
c. Two. d. Three.

Ques 5: the Basel Committee on Banking Supervision (BCBS)

published "Principles for Sound Liquidity Risk Management and
Supervision" in September 2008. How many principles are there?
a. 10. b. 11.
c. 12. d. 13.

Ques 6: Basel-III has tried sincerely to plug the loopholes of Basel-II

guidelines in Four different ways. Which one is not in this list?
a. First, it has mandated a higher capital adequacy ratio (CAR) to
absorb potential losses originating in both trading and banking
books, including additional capital conservation buffers (2.5%).
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b. Second, it has taken steps to reduce the variability of the risk
weighted assets by limiting the discretion of banks.
c. Third measure brought-in is introduction of leverage ratio.
Banks, by exploiting the risk weight function, kept lower capital to
curb this tendency, BCBS has brought in a non-risk weighted
leverage ratio.
d. Fourth measure taken by BCBS is introduction of one new
liquidity ratio namely Net Stable Funding Ratio (NSFR).

Note: Fourth measure taken by BCBS is introduction of new

liquidity ratios such as Liquidity Coverage Ratio (LCR) and Net
Stable Funding Ratio (NSFR).

Ques 7: There are two simple ways of measuring liquidity; one is

the stock approach and the other one is?
a. Equity approach. b. Flow approach.
c. Cash approach. d. Fund approach.
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Ques 8: Match the following?
Team Responsibility in Liquidity Risk Management

(x) The Board of Directors (i) It should have the overall responsibility
(BOD). for management of liquidity risk.

(y) The Risk Management (ii) It should be responsible for evaluating

Committee. the overall risks faced by the bank including
liquidity risk.

(z) The Asset-Liability (iii) It is consisting of the bank's top

Management Committee management and it should be responsible
(ALCO). for ensuring adherence to the risk tolerance
/limits set by the Board.

(t) The Asset Liability (iv) It is consisting of operating staff and it

Management (ALM) should be responsible for analyzing,
Support Group. monitoring and reporting the liquidity risk
profile to the ALCO.

a. (x)- (i), (y)- (ii), (z)- (iii), (t)- (iv).

b. (x)- (iii), (y)- (ii), (z)- (i), (t)- (iv).
c. (x)- (i), (y)- (iv), (z)- (iii), (t)- (ii).
d. (x)- (iii), (y)- (i), (z)- (iv), (t)- (ii).
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Ques 9: In Risk management framework of the bank, which risk is
called as “Fatal Risk”?
a. Liquidity Risk. b. Interest Rate Risk.
c. Settlement Risk. d. Forex Risk.
Ques 10: The risk tolerance should define the level of liquidity risk
that the bank is willing to assume and should reflect the bank's
financial condition and funding capacity. Who set the liquidity risk
tolerance level in bank?
a. CVO. b. MD/CEO.
c. CCO. d. Board of Directors.

Ques 11: Guidelines on Liquidity Risk Management by Banks issued

by RBI have also given the illustrative list of the ----- stock ratios?
a. Three. b. Four.
c. Five. d. Seven.
Ques 12: Stock ratios “Temporary Assets/Volatile Liabilities”,
measures the cover of liquid investments relative to volatile
liabilities. A ratio of ------ indicates the possibility of a liquidity
problem?
a. 1 b. More than 1.
c. Less than 1. d. More than or equal to 1.
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Ques 13: Stock ratios “Core deposits/Total Assets”, measures the
extent to which assets are funded through stable deposit base.
Which of following represents the core deposit?
a. All deposits (including CASA) above 1 year + net worth.
b. All deposits (including CASA) above 2 years + net worth.
c. All deposits (including CASA) above 4 years + net worth.
d. All deposits (including CASA) above 5 years + net worth.
Ques 14: “Statement on Liquidity Coverage Ratio” is Basel III
Liquidity Returns (BLR-1), Basel III Liquidity Returns for “LCR by
Significant Currency” is?
a. BLR-2. b. BLR-4.
c. BLR-3. d. BLR-1.
Ques 15: In this approach of operational risk, banks' activities are
divided into eight business lines. The capital charge for each
business line is calculated by multiplying gross income by a factor
(denoted by beta) assigned to that business line (Beta Factors)?
a. The Basic Indicator Approach (BIA).
b. The Standardized Approach (TSA).
c. Advanced Measurement Approaches (AMA).
d. None.
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Ques 16: Capital Charge under Advanced Measurement Approach
(AMA) is calculated based on many factors. Estimated level of
operational risk depends on?
a. Estimated probability of occurrence.
b. Estimated potential financial impact.
c. Estimated impact of external controls.
d. Estimated impact of internal controls.
Ques 17: What is 'CORDEx India’?
a. A company started by Indian Banks' Association (IBA) which
primary job is to collect loss data from all the banks in our country.
b. A company started by Indian Banks' Association (IBA) which
primary job is to collect profit data from all the banks in our
country.
c. A company started by IIBF which primary job is to collect loss
data from all the banks in our country.
d. A company started by IIBF which primary job is to collect profit
data from all the banks in our country.
Note: External Loss Data is one of the requirements under AMA,
under the initiative of Indian Banks' Association, a Company was
started with the name 'CORDEx India, whose primary job is to
collect loss data from all the banks in our country.
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Ques 18: To align the risk management system with the best
practices, RBI has advised Banks regarding Integrated Risk
Management vide its guidelines of April, 2017. Which statement is
incorrect?
a. Banks should appoint a Chief Risk Officer (CRO).
b. Banks should lay down a Board-approved policy clearly defining
the role and responsibilities of the CRO.
c. CRO has to control and co-ordinate the functions of the Risk
Management Department of the Bank.
d. Because of the importance RBI gives to this post, RBI has made
CRO to report directly to the Board of Directors of the Bank.

Ques 19: Under the AMA of operational risk, a bank will be allowed
to recognize the risk mitigating impact of insurance in the
measures of operational risk. The recognition of insurance
mitigation will be limited to ----- of the total operational risk capital
charge?
a. 20%. b. 20%.
c. 15%. d. 50%.
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Ques 20: Which statements are correct?
x. Lower risk implies lower variability in net cash flow with lower
upside and downside potential.
y. Higher risk implies higher variability in net cash flow with higher
upside and downside potential.
z. Higher risk implies lower variability in net cash flow with lower
upside and downside potential.
t. Lower risk implies higher variability in net cash flow with higher
upside and downside potential.

a. Only x and z. b. Only y and z.

c. Only x and y. d. Only x, y and t.
Ques 21: RAROC is a better performance measures when
compared to measures like Return on Assets (ROA) or Return on
Equity (ROE) because?
a. It is recommend by BASEL committee to use RAROC as
performance measure.
b. RAROC consider the risk taken by the bank to get the returns.
c. It takes into account the dividend declared by organization.
d. It estimates the future performance using based on past trends.
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Ques 22: Which statements are correct?
a. The higher the RAROC, the higher is the reward to investors/
shareholders and more preferable such investment would be to
the market.
b. The lower the RAROC, the higher is the reward to investors/
shareholders and more preferable such investment would be to
the market.
c. The higher the RAROC, the lower is the reward to investors/
shareholders and less preferable such investment would be to the
market.
d. The higher the RAROC, the higher is the reward to investors/
shareholders and less preferable such investment would be to the
market.
Ques 23: Risk Pricing takes into account which of the following?
x. Operating Expenses. y. Cost of Deployable Funds.
z. Profit Probabilities. p. Loss Probabilities.
q. Capital Charge. r. Profit Margin or Return on Net worth.

a. Only x, y, z and p. b. Only y, z, p and q.

c. Only x, y, z, p and q. d. Only x, y, p, q and r.
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Answer:
Q1. b. 5% of the book value.
Q2. a. COSO
Q3. a. Vigilance.
Q4. b. Four.
Q5. d. 13.
Q6. d. Fourth measure taken by BCBS is introduction of one new
liquidity ratio namely Net Stable Funding Ratio (NSFR).
Q7. b. Flow approach.
Q8. a. (x)- (i), (y)- (ii), (z)- (iii), (t)- (iv).
Q9. a. Liquidity Risk.
Q10. d. Board of Directors.
Q11. d. Seven.
Q12. c. Less than 1.
Q13. a. All deposits (including CASA) above 1 year + net worth.
Q14. b. BLR-4.
Q15. b. The Standardized Approach (TSA).
Q16. c. Estimated impact of external controls.
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Q17. a. A company started by Indian Banks' Association (IBA)
which primary job is to collect loss data from all the banks in our
country.
Q18. d. Because of the importance RBI gives to this post, RBI has
made CRO to report directly to the Board of Directors of the Bank.
[correct: MD or CEO]
Q19. b. 20%.
Q20. a. Only x and z
Q21. b. RAROC consider the risk taken by the bank to get the
returns.
Q22. a. The higher the RAROC, the higher is the reward to
investors/ shareholders and more preferable such investment
would be to the market.
Q23. d. Only x, y, p, q and r.