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CMA Final · Risk Management in Banking and Insurance · Sovereign Risk and Insolvency Risk

Which statement about insolvency risk of a bank is most accurate?

Insolvency risk for a bank is the risk that losses exceed its capital, leaving assets worth less than liabilities. It differs from liquidity risk, which concerns timing of cash, and holding statutory liquidity assets does not remove it.

  1. AIt is the risk that the bank's losses exceed its capital so that its assets become insufficient to meet its liabilitiesCorrect
  2. BIt is the risk that the bank cannot borrow in the interbank market for one day because of a technical failure
  3. CIt arises only from a change in the policy repo rate
  4. DIt is eliminated entirely once a bank maintains the minimum statutory liquidity ratio

Explanation

Insolvency risk means losses erode capital so assets fall below liabilities. A short-term inability to borrow is a liquidity problem, repo changes mainly drive interest rate risk, and holding SLR addresses liquidity, not solvency.

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