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. 031How does IFRS 9 expected credit loss differ from Basel regulatory expected loss?Credit riskHardsuperdayBank credit riskRegulatory reporting

   Say this

   Different purposes, so different parameters. IFRS 9 is accounting: point-in-time, forward-looking, neutral, and lifetime for Stage 2 and 3. Basel is prudential: through-the-cycle PD, downturn LGD, twelve-month horizon, and deliberately conservative.

   Then walk it

   1. Horizon. Basel EL is always twelve months. IFRS 9 is twelve months in Stage 1 and lifetime in Stages 2 and 3.
   2. PD. Basel wants a long-run average, through-the-cycle PD. IFRS 9 wants a point-in-time PD conditioned on a macro forecast.
   3. LGD. Basel requires downturn LGD, a stressed recovery assumption. IFRS 9 wants a neutral, expected LGD with no prudential margin.
   4. Discounting. IFRS 9 discounts cash shortfalls at the effective interest rate. Basel EL is undiscounted.
   5. Then the reconciliation, which is where real work happens. For IRB banks, if accounting provisions exceed Basel EL, the excess counts in Tier 2 up to a cap of 0.6 percent of credit RWA. If provisions fall short, the shortfall is deducted straight from CET1. So the two frameworks meet in the capital ratio.
   6. For standardised-approach banks it's different again: general provisions can count in Tier 2 up to 1.25 percent of credit RWA, and specific provisions reduce the exposure value.
   7. And the transitional arrangements matter historically. When IFRS 9 came in, supervisors allowed a phase-in of the day-one CET1 hit precisely because the provision increase was large enough to be destabilising.

   Where candidates lose it

   Treating them as the same number with different labels. Naming the four parameter differences is table stakes; the answer that lands explains the CET1 shortfall deduction and the Tier 2 excess cap, because that's the bit that actually affects a bank's capital ratio.

   Expect next

   • What happens to CET1 if provisions are below Basel EL?
   • Why is Basel LGD downturn and IFRS 9 LGD neutral?
   • Which framework produced a bigger provision in 2020?
2. 035Explain the Merton model, and the difference between structural and reduced-form credit models.Credit riskHardtechnicalBank credit riskModel validation

   Say this

   Merton treats equity as a call option on the firm's assets with a strike equal to its debt. Default happens when asset value falls below debt at maturity, so you can back out a default probability from the equity price and its volatility. That's the structural family; reduced-form models skip the story and fit default intensity straight from market spreads.

   Then walk it

   1. The Merton set-up: firm assets follow a lognormal process, equity holders own a call with strike equal to the debt face value, and default probability is the chance the asset value ends below that strike. Distance to default is how many asset standard deviations you are above the barrier.
   2. The clever part is that it's forward-looking and uses market data. Equity prices update every second, so a structural PD reacts long before a rating agency does. That's what Moody's KMV commercialised as EDF.
   3. Its weaknesses are specific. It underpredicts short-term default because the asset process is continuous and can't jump. It needs asset value and asset volatility, neither of which is observable. It assumes one debt maturity. And it produces credit spreads well below observed ones, the credit spread puzzle.
   4. Reduced-form, or intensity models like Jarrow-Turnbull and Duffie-Singleton, take default as an exogenous Poisson-type event with a hazard rate calibrated from CDS or bond spreads. No story about why the firm defaults, just a fit to prices.
   5. So the trade-off: structural models explain and give you economic intuition and a link to the equity market. Reduced-form models fit market prices and are what you use to value and hedge credit derivatives.
   6. In practice a bank uses both and for different jobs. Structural or hybrid models for wholesale PD estimation and early warning; reduced-form for pricing and for CVA. And the risk-management caveat: a structural model's PD spikes whenever equity vol spikes, so it's cyclical and noisy, which is fine as an early warning signal and bad as a provisioning input.

   Where candidates lose it

   Describing equity as a call option and stopping. The interviewer will ask what's wrong with Merton, and 'it underpredicts short-horizon default because assets can't jump' plus 'asset value and asset volatility aren't observable' are the answers. Also be able to say which model you'd use for pricing versus for PD estimation.

   Expect next

   • What is distance to default?
   • Why does Merton understate short-term default risk?
   • Which would you use to price a CDS?

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.