Risk Management interview preparation

Questions

100

Traced to a firm

37

Firms

12

Updated

September 2026

Asked at

All firmsUBS14MSCI7BLBlackRock5FTFranklin Templeton3Oaktree Capital Management2Scotiabank2Jane Street1Moody's1Neuberger Berman1PIMCO1SSState Street1TSTruist Securities1

Topic

All topicsMarket risk and VaR14Tail risk and stress testing5Greeks and sensitivities5Credit risk11Counterparty risk and CVA6Operational risk5Model risk and validation6Regulatory capital7Liquidity risk and ALM6Statistics and quant foundations7Indian regulation7Risk governance and appetite4Markets and macro9Fit and career8

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Type

AnyTechnicalCaseBrainteaserMarket viewFit

1. 025Explain PD, LGD and EAD.Credit riskCorephone / first roundBank credit riskRating agencies

   Say this

   They're the three inputs to expected loss. Probability of default is how likely the borrower stops paying, loss given default is the fraction you don't recover, and exposure at default is how much is outstanding when it happens. Multiply the three and you have expected loss.

   Then walk it

   1. PD is a probability over a horizon, usually one year, and it comes from a rating or a scorecard. Say the horizon, because a one-year PD and a lifetime PD are very different numbers.
   2. LGD is one minus the recovery rate, expressed on the exposure. It's driven by collateral, seniority and how good the legal enforcement regime is. Senior secured on a warehouse in a good jurisdiction might be 25 percent; unsecured sub debt is 70 to 90.
   3. EAD is what's actually outstanding at default. For a term loan it's roughly the drawn balance. For a revolver or a credit card it's the drawn amount plus a credit conversion factor on the undrawn part, because stressed borrowers draw their lines down before they default.
   4. Worked number: a 100 crore facility, PD of 2 percent, LGD of 40 percent gives expected loss of 0.8 crore, so 80 basis points. That's a provisioning and pricing number, not a capital number.
   5. The three are not independent, and that's the bit people miss. In a recession PD rises and recoveries fall at the same time, because collateral values are down and everyone is selling. That's downturn LGD, and Basel requires you to use it rather than a long-run average.
   6. For a derivative there's no drawn balance, so EAD has to be modelled from potential future exposure. That's a different exercise entirely, and it's why counterparty credit risk has its own framework.

   Where candidates lose it

   Getting the definitions right and missing that PD and LGD are correlated. Using an average recovery rate through a downturn understates loss badly, and downturn LGD is a specific Basel requirement. Also state the PD horizon; a PD without a horizon is not a number.

   Expect next

   • Why does Basel require downturn LGD?
   • How do you estimate EAD on a revolver?
   • How would you estimate PD for a borrower with no rating?
2. 026What's the difference between expected and unexpected loss, and which one does capital cover?Credit riskCoretechnicalBank credit riskRegulatory reporting

   Say this

   Expected loss is the average you lose in a normal year, and it's covered by provisions and priced into the loan spread. Unexpected loss is the deviation above that in a bad year, and that's what capital is for. Provisions cover the mean, capital covers the tail.

   Then walk it

   1. Expected loss is PD times LGD times EAD. It's a cost of doing business, so it belongs in the price. If your spread doesn't cover EL plus funding plus operating cost plus a return on capital, you're lending at a loss.
   2. Unexpected loss is the distance from the mean to a high quantile of the loss distribution, usually 99.9 percent over one year in Basel's IRB framework. That's the one-in-a-thousand-year bad year the bank is supposed to survive.
   3. The distribution is heavily right-skewed, not normal, because defaults are correlated. Most years you lose a little, occasionally you lose a lot, and the asymmetry is driven entirely by that correlation.
   4. The mechanism is the asset correlation assumption. If defaults were independent, a large portfolio would have almost no unexpected loss and you'd need almost no capital. Basel's IRB formula bakes in correlations of roughly 12 to 24 percent for corporates, and it's that number, not PD, that creates the capital requirement.
   5. Numerical feel: a portfolio with 80 basis points of expected loss might carry a 99.9 percent loss of 5 or 6 percent. So capital is several times provisions, and that ratio widens for a concentrated book.
   6. The gap that matters in practice: IFRS 9 provisions and Basel expected loss are computed differently, so the two rarely agree, and the shortfall or excess adjusts CET1. That reconciliation is a real job in a bank's finance and risk function.

   Where candidates lose it

   Saying capital covers expected loss. It doesn't, provisions do, and mixing those up is a hard fail in a credit risk interview. The answer that stands out names asset correlation as the thing generating unexpected loss, because a candidate who says that understands why a diversified book still needs capital.

   Expect next

   • Why is the loss distribution skewed?
   • What drives the size of unexpected loss more, PD or correlation?
   • How does the IFRS 9 provision interact with regulatory capital?

Firm tags come from public, anonymous candidate reports on Wall Street Oasis: strong signal, not sworn testimony. Firms are named as the places a question was reported, not as partners of Fin Maverick. Answers are written for this page to show how to think out loud; they are not scripts to recite.