In a global bank, which of the following item(s) is (are) subject to the activities of The banks Credit risk exposure
posure determines its minimum regulatory capital (T) The Large banks often own many different types of derivatives, but among which, only few
investment bank division: Commodity trade finance (T) underwriting (T) bonds
insurance (T) Mortgage (F)
For an investment bank which of the following account are relevant
Assets-backed securities (T) IPO underwriting fee (T) Deposits of individual clients (F)
/ auto loans (F)
Derivative topics
Servicer of the loan (T) securities underwriter (T) financial guarantor (T) Special
purpose entity (F)
On January 1 N, a financial institution plans to buy 1’500 shares of a corporate stock in
3 years. The current market price is $100 per share. To lock the purchase price, the
institution enters three-year stock option contracts with a contract size of 10 shares,
exercise price at $ 95 per share, number of contracts: 12. For this financial institution,
which of the following statement(s) on this option contract is(are) correct?
It’s the hedging instrument for fair value hedge (F) It’s the hedging instrument for cash
flow hedge (T) It’s an underhedged instrument for future corporate stocks (T) It’s the
hedged item for cash flow hedge (F)
Select the statement which correctly addresses the characteristics of derivatives.
Investing in derivatives can serve speculative purposes (T) Derivative’s notional value
is often much higher than its carrying amount (T) Derivatives can be highly risky due
to leverage (T) Derivatives provide investors with the opportunity to hedge against
risks (T)
Regarding the concept of hedge accounting, which of the following comment(s) is (are)
correct? The effect of CR must not dominate the value changes associated with the
hedged risk (T) Both derivatives and non-derivative items can be hedging instruments
(T) A holding company can establish a hedging relationship with the subsidiary (F) If a
hedging relationship meets the hedge accounting qualification, the hedge accounting
can be applied until the contract expires. (F)
Case study topics
Deutsche Bank manages credit exposures actively by utilizing securitization. With
regard to the accounting for securitization, which comment(s) is (are) correct?
Under the sales accounting scenario, securitized assets are derecognized from the
bank's balance sheet and transferred to a special-purpose entity (SPE) (T) The bank
should consolidate with the securitization entity if the bank holds control of financial
interests (T) The bank can use sales accounting even if it maintains the mortgage
service right (T) Under the secured borrowing scenario, securitized assets are disclosed
as off-balance sheet items. (F)
In the case of credit Suisse and Greensill Capital, which of the below different risks
you identify is(are) subject to the scandal?: compliance (T) / operational (T) / credit
risk (T)
Market risk (F)
In the case of Credit Suisse and Greensill Capital, which of the following mitigation
tool(s) is(are) appropriate that may enable the bank to mitigate compliance risk?
Conduct 4eye review on the documents signed (T) Reassessment of collateral used (F)
Assess the parameters and limits used in artificial intelligence by the fund (F) Assess
solvency risk of borrowers. (F)
Referring to the Lehman Brothers case, cite three main factors that make the risk
management system of the firm inefficient: The regulator could play a key role in
monitoring risk management to avoid the collapse of Lehman Brothers (T) After 2006,
the risk framework is not complete and independent in decision (T) Downward pricing
in real estate is the main external factor that drives the collapse of Lehman Brothers (T)
The replacement of CRO by an incompetent person. (T)
In the annual report UBS 2021, the bank provides a table of Reconciliation of IFRS
equity to Swiss SRB common equity tier 1 capital, select the items that adjust
negatively the IFRS equity to Common equity tier 1 capital. Prudential valuation
adjustments (T) Goodwill, net of tax (T) Minority interests (T) Deferred tax assets
recognized for tax loss carry-forwards (T)
SVB risk based on business model
Market risk (T) / liquidity risk (T) Fraud risk (F) credit risk (F)
Credit risk topics
What is(are) the solutions that banks can use to mitigate credit risk associated with a
loan? Collateral (T) guarantee (T) credit default swap (T) loan covenant (T)
The following statements address the concept of credit risk and its impacts on banks,
select the correct one(s): Financial assets measured at fair value are subject to CR (T)
Financial assets at FVOCI are subject to CR (T) Credit risk can also be hedged by
derivative (T) Credit risk refers to potential losses due to counterparty default or
solvency deterioration. Off-balance-sheet items are subject to credit risk. (T) Basel
rules and IFRS apply different rules on credit risk estimates (T) CR refers to potential
losses due to counterparty default or solvency deterioration (T)
The following statements address the concept of CR for a global bank
Scenario 1b: the securitized mortgages remain recognized on PIB balance sheet as
bank can apply internal based model to estimate credit risk (T) Credit risk only subject
to on balance sheet items (F) also off BS Credit risk refers to potential losses due to
banks solvency deterioration (F)
Among the below accounts selects the ones subject to counterparty CR
Derivative assets (T) Investment securities (T) Letters of credit (F)  contingent risk
Banks own debt (F)  bank default risk (T)
In the annual report UBS 2021, the bank provides a table of Reconciliation of IFRS
equity to Swiss SRB common equity tier 1 capital, select the items that may adjust
negatively the IFRS equity to Common equity tier 1 capital.
Deferred tax assets are recognized for tax loss carry-forward (T) PVA (T), Goodwill
(net of tax) (T) exp. Losses on advanced internal rating-based portfolio less provisions
(T)
A Swiss retail bank uses Swiss law as accounting reference, which of the following
comment(s) is(are) correct? The collaterals accepted by the bank are recorded as
financial assets. (T) In trading book, the bank records the transactions ordered by
customers. (F) The rise in interest rate will increase the value of debt securities
recorded in banking book. (F) Change in interest rate risk will result in gains / losses on
investment portfolio, regardless of this investment portfolio is recorded in trading book
or banking book (F)
Regulatory capital subjects
Which solution(s) can improve banks’ regulatory capital ratio? Securitization of loans
with high-risk exposure (T) Increase capital by issuing new shares (T) Stop guarantees
provided to corporate customers (T) Increase clients’ deposit. (F)
Which of the following comment(s) on the regulatory capital is(are) correct?
Regulatory capital requirements differ by banks social and economic impact (T) Capital
Adequacy Ordinance (CAO) applies to Swiss banks regulated by FINMA (T)
Regulatory capital is based on fair value accounting. (F) Off-balance sheet items are
not relevant to the regulatory capital adjustments. (F)
According to Basel III, select the regulatory ratio(s) which are risk sensitive
CET1 capital ratio (T) Liquidity Coverage ratio (T) NSFR (T) Leverage ratio (F)
Suppose that in Q1-2020, a bank capital adequacy ratio fell below the minimum
regulatory requirements, which solution can improve the regulatory capital ratio ?
Stop the bank guarantees provided to corporate customers (T) Hedge financial assets
with market risk exposure (T) Increase clients deposits (F) Secured borrowing from the
central bank (F)
Compared with industry firms, the banks’ financial statement(s) is(are) characterized
as:
High leverage (T) Heavy financial assets (T) Limited distinction between current /
noncurrent accounts (T) Arbitrary classification in cash flow statement (T) High
liquidity (F) Low margin (F)
According to Basel III and Capital Adequacy Ordinance (CAO), which of following
instrument(s) may contribute to loss absorption on a going-concern basis:
High contingent convertible securities (CoCos) (T) AT1 capital instruments (T) Client’s
deposit (F) / Tier 2 capital instruments (F)
The following statement(s) discuss the impact of credit risk on a bank's reconciliation
adjustment between IFRS 9 equity and the Basel III regulatory capital, select the
correct one(s):
The Basel approach to calculating expected losses is usually more conservative than the
IFRS 9 approach. (T) If the regulatory ECL is larger than IFRS9 ECL, the bank’s
regulatory capital should subtract this difference from the IFRS equity. (T) Comparing
with standard approach, advanced internal-based approach (A-IRB) is more compatible
to IFRS 9 ECL in estimating expected credit losses. (T) The Basel III A-IRB approach
takes into account expected losses resulting from expected default events occurring
within the next 12 months (T) The Basel III A-IRB approach estimated the expected
losses resulting from a default event over the lifetime of the transaction. (F)
ECL (IFRS 9) Topics
A bank apples IFRS 9 the approach of Expected Credit Loss (ECL) for loans, which of
the following comment(s) is (are) correct with regard to the impact of Covid-19 during
2020 to 2021?
In Q1 2020, following the Covid-19 related downturn, more loans are likely to be
transferred from Stage 1 to stage 2 or 3 (T) In 2021, as the economic development was
more positive than anticipated, following the covid 19 related downturn in 2020, ECL
allowance decreased and led to a positive impact on net income (T) In Q1 2020, when a
loan is classified at stage II, a full lifetime is required (T) In 2021 ECL allowance is not
necessary, if non performing loan is reclassified as performing in Stage 1 (F)
A bank apples IFRS 9 the approach of Expected Credit Loss (ECL) for loans, which of
the following comment(s) is (are) correct with regard to the impact of Covid-19
pandemic on bank’s credit risk during 2020 to 2022?
In 2022Q1, with the economy in full recovery, when a loan is classified at Stage 1, a
12-month ECL is required. (T) In 2020, following the economic downturn of COVID-
19 crisis, the bank tends to transfer more loans from Stage 1 to Stage 2. (T) In 2021, as
the economic gradually recovers from the COVID-19-related downturn, the movement
on ECL allowance was negative, which led to a positive impact on net income. (T) In
2021, ECL allowance is zero if a loan is reclassified from non-performing loan in Stage
2 to as performing loan in Stage 1. (F)
Under IFRS 9 which comment on Expected Credit loss model of loans impairment are
correct The application of ECL model affect banks interest income (T) When a loan is
classified at Stage II, a full lifetime ECL is required (T) Loan loss provision is not
necessary if the loan is classified as performing (F) ECL model is based on historical
statistics (F)
derivatives are subject to hedge accounting. Which of the following comment(s) about pledged assets: secured borrowing
hedge accounting is(are) correct? There should exist an economic relationship between Scenario 2: PIB holds the majority of SPE’s capital: consolidation with SPE
the hedged item and the hedging instrument (T) the hedging relationship should be Scenario 2b: SPE holds the control for the securitized mortgages of both tranches :
used for the bank’s risk management purpose (T) the changes in the FV of the hedging sales accounting
instrument should equal to the changes in the FV of the hedged item (F) eligible 01.01.N 31.12.N 31.12.N+1 31.12.N+2
hedging instrument must be a derivative (F) (can be a non-derivative) Market value of the security 100 110 120 70
Other topics Fair value of the future contract 0 -10 -25 20
In Q1-N, Fortune bank issues a non-pre reimbursable bond with a duration of 10 years, To lock the purchase price based on the current market price of 100, the entity enters a
floating rate, payable quarterly. The banks applies FV option for this own bond. After 3 years future contract at 100 120-110 = 10 // 25-10 = 15 // 10/15 = 0.67
the bonds issuance, market interest income increases and the other conditions remain Calculating IFRS equity before adjustment (eligible CET1) 547 equity before adj.
unchanged, select the correct comments on accounting for this bond Goodwill, net of tax 15
Bank’s interest expense increases (T) The fair value of this bond does not change (T) Deferred tax asset, net of tax 63
The fair value of this bond decreases (F) Debt valuation adjustment is positive (F) Unrealized losses from cash flow hedge -102
In January 2021, required by ultra high net worth client, a trader of a swiss private bank DVA losses due to the own credit risk change in FV liabilities -36
executed the order for this client to purchase 10 bitcoins paid from the clients’ deposit Prudent valuation adjustment (PVA) 230
account in the bank. In Q2 2021, the price of the bitcoin dropped about 60% compared 547 – 15 – 63 + 102 + 36 – 230 = 377
with initial purchase price, according too Circ. FINMA 2020/1, which of the following XYZ Bank establishes a pass-through securitization with a special purpose entity (SPE)
comment on this transaction are correct? for a portfolio of auto loans valued at $150 million, subject to the following condition:
Impacts on banks off-balance sheet items (T) The bank suffered an investment loss (F) Bank received $140 million in cash. The transferred senior tranche was valued at $120
No impacts on banks balance sheet items (F) The bank suffered a higher RWA (F) million. The retained subordinated tranche was valued at $20 million. Retained
Among the legal framework, select the items relevant to swiss banks accounting & rep. servicing rights with an estimated fair value of $5 million Recourse obligation with an
Ordonnance sur les banques (T) FINMA circulaire (T) CO (T) loi sur les banques (T) estimated fair value of $3 million. The securitization qualifies for sales accounting.
Select the regulatory authority(ies) that regulate(s) and supervise(s) banking and What is the impact of this securitization on the bank's income? 150 + 3 (right side) /
financial service firms in Switzerland: FINMA (T) European central bank (F) Basel 140+20+5 (left side)  165 – 153 = 12 (gain on sale of 12 millinos)
Committee on Banking Supervision (BCBS) (F) / Swiss National Bank (F) Based on the below statistics, calculate the amount of VAR on a daily basis, in million
Market risk topics CHF: Size of the portfolio = CHF 1 million The volatility in portfolio value per month
The following statement address the implications of market risk and its impacts on = 5% (21 trading days per month) The confidence level at 95% (The final amount
banks reporting: Market risk affects regulatory capital ratio through RWA (correct with rounds to 3 decimal places) 5%/racine de 21 * 1.65 * 1mio =0.018 mio
RWA also) (T) Items in banks trading book are subject to market risk (T) PVA subjects Bank ABC applies Expected credit loss (ECL) under IFRS 9, see below the movement
to banks assets valued at mark to market (MTM) (T) Commodity risk is one type of of ECL during the year 2021. Total
market risk (T) Foreign exchange risk is one type of market risk (T) Market risk might Beginning balance ECL allowance 1’468
be correlated with credit risk (T) Interest rate risk (IRR) is one type of market risk (T) Movement of provision during year -203
Market risk is relevant to trading accounts and investment accounts (T) Items in banks ECL allowance due to changes in model inputs or assumptions 59
investment book are not subject to MR (F) Financial assets at FVOCI are not subject ECL allowance due to model change -45
to MR (F) When interest rates increase, banks will benefit from the investment on Remeasurements ECL due to stage transfers 40
fixed-income securities. (F) Only the assets valued by marked-to-market are subject to Allowance change due to write-off uncollectible loans -155
market risk (F) (level 2 also) Ending balance ECL allowance 1’164
Which items are exposed to market risk Equity instruments in trading book (T) Fix- Question:How much is the total impact on net income, due to the movement of ECL
floating SWAP (T) gold & commodities (T) Unsecured fixed rate loans (F) allowance during year 2021? Please give the amount with
For a swiss commercial bank wich items are exposed to market risk ? signal (+ or -).: 203 -59 + 45 – 40 =+149
SARON-based mortgage (T) bank loans denominated in Euro (T) Credit card loans (F)
client’s portfolio book (F)
Which of the following comment(s) on banks’ risk weighted assets is(are) correct?
Leverage ratio is not risk sensitive  RWA is not used to calculate bank Lvg ratio (T)
RWA for operational risk is based on income statement items. (T) RWA is based on risk
exposure and risk type. (T) RWA cover the risk exposure rising from banks off balance
sheet items (T) Items on banks income statement is irrelevant to calculate RWA (F)
Which risks items affects banks RWA (T) Interest rate risk (T) Operational risk (T)
Liquidity risk (F) Fraud risk (F)
Which of the following risk(s) can be mitigated by Asset-Liability Management
(ALM)? Interest risk (T) liquidity risk (T) currency risk (T) Credit risk (F) compliance
risk (F)
Which of the following comments on the general characteristics of bank
accounting is(are) correct? Banks are highly leveraged. (T) Banks have lower range of
assets than industry firms (T) The classification of banks cash flow statement is
arbitrage. (T) Interest income is the main revenue of traditional retail banks. (T)
2020 mock
Which of the following comments on Risk Weighted Asset (RWA) is (are) correct?
RWA coefficients vary by different categories of financial assets. (T) RWA is required
by Basel rules, not IFRS. (T) Banks may apply different approaches to calculate risk-
weighted assets. (T) RWAs are only determined by banks credit risk exposure (F) (also
MR)
For a banking auditor, which of the following issues he(she) should consider the
potential accounting discretion when he (she) check an investment security
classified as financial assets at fair value through other comprehensive income?
assume that the bank applies IFRS but does not select the Fair Value Option for
financial assets and financial liabilities.
Reclassification to financial assets at fair value through profit or loss (T) Impairment of
financial assets (T) Credit valuation adjustment (CVA) (F) Loan loss provision (F)
For Swiss banks, which of the following comments on the regulation and bank
reporting is(are) correct: FINMA has set higher capital ratios for some Swiss banks
than Basel requirement. (T) Swiss banks’ capital requirement depends on size and
classification (T) All Swiss banks apply swiss bank rules according to Swiss Code of
Obligation (F) All Swiss banks apply the IFRS as reporting standards. (F)
Exercices
Prime Invest Bank (PIB) conducts tranched subprime mortgage securitizations in which
two tranches, senior and junior, are created. PIB retains 10% the senior tranche and
transfers the entire junior tranche to a qualified special purpose entity (SPE). Both
transferred tranches are finally sold to a hedge fund firm. Refer to the following
description of the securitization above, click the accounting method that PIB should
apply for this securitization.
Scenario 1: PIB keeps continuous involvement in both tranches: Secured borrowing