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

Level

AnyCoreIntermediateHard

Type

AnyTechnicalCaseBrainteaserMarket viewFit

1. 056Standardised versus internal ratings based approach. Which would you rather run?Regulatory capitalIntermediatetechnicalRegulatory reportingBank credit risk

   Say this

   IRB usually gives lower capital and better risk sensitivity, so a large bank wants it. But it costs a great deal to build, maintain and defend, and after the Basel IV output floor the capital saving is capped, so for many portfolios the honest answer is now standardised.

   Then walk it

   1. Standardised: prescribed risk weights by exposure class and external rating. Cheap, comparable across banks, transparent, and completely insensitive to whether your borrowers are good or bad within a bucket. Every unrated corporate gets 100 percent whether it's excellent or nearly insolvent.
   2. Foundation IRB: you estimate PD, the supervisor sets LGD and EAD. Advanced IRB: you estimate all three. Both need supervisory approval, years of clean data, validated models and demonstrated use in actual credit decisions, the use test.
   3. The capital saving is real, often 20 to 40 percent lower RWA on a good-quality retail or mortgage book, because the prescribed weights are calibrated conservatively for the average bank.
   4. The costs: model development and validation teams, data infrastructure with long histories, annual supervisory review, and the risk that a supervisor imposes a multiplier or pulls approval, which produces a sudden capital hit. Several European banks have taken exactly that.
   5. Then Basel IV changes the calculus. The output floor requires total RWA to be at least 72.5 percent of what the standardised approach would give, phased in. Advanced IRB has been removed for exposures to large corporates and banks, and equity IRB is gone. So the saving is bounded and the cheapest portfolios to model no longer qualify.
   6. My answer: IRB where the portfolio is large, homogeneous, data-rich and where internal models genuinely discriminate, so retail mortgages and retail lending. Standardised for low-default wholesale portfolios where you were never going to estimate PD credibly anyway. Running IRB for its own sake is a large cost for capped benefit.
   7. The point worth making that goes beyond capital: the real value of IRB was never the capital saving, it was that building the models forces a bank to understand its own credit risk. Banks that adopted IRB seriously ended up with better credit decisions, and that survives the output floor.

   Where candidates lose it

   Answering 'IRB because it's lower capital'. Post-Basel IV that's only partly true, and a candidate who hasn't registered the output floor and the withdrawal of advanced IRB for large corporates is working from pre-2017 knowledge. Mention the use test too; supervisors care more about it than about the maths.

   Expect next

   • What is the use test?
   • Which portfolios can no longer use advanced IRB?
   • What happens if a supervisor withdraws IRB permission?
2. 058Why does a leverage ratio exist alongside risk-weighted capital?Regulatory capitalIntermediatetechnicalRegulatory reportingBank market risk

   Say this

   Because risk weights are model outputs and models can be wrong or gamed. The leverage ratio is a non-risk-based backstop: Tier 1 over total exposure, minimum 3 percent, and it doesn't care what you think the risk is.

   Then walk it

   1. The pre-crisis evidence is the whole argument. Banks entered 2008 with comfortable risk-based ratios and leverage of 30 or 50 to one, because sovereign debt, AAA tranches and repo books all carried tiny weights and turned out not to be riskless.
   2. So the design intent is a floor that survives being wrong about risk. It binds when a bank holds a lot of assets it has judged safe, which is exactly the situation that has historically preceded trouble.
   3. The exposure measure is deliberately broad: on-balance-sheet assets, derivative exposures including a potential future exposure add-on, securities financing transactions, and off-balance-sheet commitments converted at credit conversion factors. You can't shrink it by netting the way you can for RWA.
   4. Who it binds: banks with large low-risk-weight books. Custodians, repo intermediaries, and banks holding large government bond portfolios. For those, leverage rather than RWA is the constraint that drives the business decision.
   5. Its own weakness, and you should say it: it's risk-insensitive by construction, so it treats a treasury bill and an unsecured emerging market loan identically. That creates an incentive to shift toward higher-yielding, higher-risk assets once the ratio binds, which is the opposite of what you want.
   6. So the two measures are deliberate complements. Risk weights give you sensitivity and can be gamed; leverage gives you robustness and rewards risk-taking at the margin. Neither alone is adequate, which is the point of having both.
   7. Live example: in 2020 several jurisdictions temporarily excluded central bank reserves from the exposure measure, because deposit inflows and QE were inflating the denominator and constraining lending. That's a good illustration of the ratio binding for reasons unrelated to risk.

   Where candidates lose it

   Stating the definition without the pre-crisis motivation, and without the downside. A complete answer says the leverage ratio pushes banks toward riskier assets at the margin, because the interviewer wants to see you can criticise a rule you also support.

   Expect next

   • Which kinds of bank does the leverage ratio bind?
   • What perverse incentive does it create?
   • Why did supervisors exclude central bank reserves in 2020?

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.