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. 053Give me Basel III in one minute.Regulatory capitalCorephone / first roundRegulatory reportingIndian bank risk and treasury

   Say this

   Basel III was the post-2008 response, and it did three things the earlier accords didn't: it raised the quality and quantity of capital, it added a leverage ratio as a non-risk-based backstop, and it introduced liquidity standards for the first time.

   Then walk it

   1. Capital quality: the focus moved to common equity Tier 1, real loss-absorbing equity. Minimum CET1 of 4.5 percent of RWAs, Tier 1 of 6, total capital of 8, plus a 2.5 percent capital conservation buffer, so a functioning bank runs at 7 percent CET1 minimum before any add-ons.
   2. Buffers on top: a countercyclical buffer of zero to 2.5 percent that supervisors raise in a boom, and a surcharge for global and domestic systemically important banks. Breaching the buffers doesn't close the bank, it restricts dividends and bonuses, which is the point.
   3. Leverage ratio: Tier 1 over total unweighted exposure, minimum 3 percent. It exists because risk weights were gamed before 2008 and banks ran 50-to-1 leverage with beautiful risk-based ratios.
   4. Liquidity, entirely new in Basel III. LCR requires 30 days of high quality liquid assets against stressed outflows. NSFR requires stable funding against illiquid assets over a year. Northern Rock was solvent, so capital rules alone were never going to be enough.
   5. Plus counterparty reforms: a CVA capital charge, higher standards for exposure modelling, and incentives to clear centrally.
   6. The Indian version: RBI applies CET1 of 5.5 percent rather than 4.5, plus a 2.5 percent conservation buffer, so minimum CRAR is 11.5 percent against Basel's 10.5. India has been consistently more conservative on the capital ratio and slower on some of the market risk pieces.
   7. The fair criticism to volunteer: complexity. The framework is thousands of pages, RWA calculations are barely comparable across banks, and that opacity is exactly what the leverage ratio and the Basel IV output floor were added to contain.

   Where candidates lose it

   Listing ratios without the three themes. What an interviewer wants is capital quality, a non-risk-based backstop, and liquidity standards. And know the Indian numbers if you're interviewing in India, because CRAR of 11.5 percent versus 10.5 is a detail that immediately places you.

   Expect next

   • Why add a leverage ratio if you already have risk weights?
   • What happens if a bank dips into its conservation buffer?
   • How does RBI's implementation differ?
2. 054What is CET1, and what qualifies as CET1 capital?Regulatory capitalCoretechnicalRegulatory reportingIndian bank risk and treasury

   Say this

   Common equity Tier 1 is the purest loss-absorbing capital: ordinary shares, share premium, retained earnings and disclosed reserves, minus a set of regulatory deductions. It's the numerator regulators actually care about, because it absorbs losses while the bank is still trading.

   Then walk it

   1. What's in it: paid-up ordinary share capital, share premium, retained earnings, accumulated other comprehensive income, and statutory reserves. Minority interests only in limited circumstances.
   2. The deductions are where the real work is: goodwill and other intangibles, deferred tax assets arising from losses, defined benefit pension surpluses, own shares held, significant investments in other financial institutions above thresholds, and the IRB shortfall of provisions against Basel expected loss.
   3. Why deductions matter so much: goodwill has no value in a liquidation, and a DTA from past losses is only worth something if you're profitable, which you aren't in the scenario the capital is for. So both get removed.
   4. The tiers above it: Additional Tier 1, which is perpetual and loss-absorbing through conversion or write-down, typically AT1 contingent convertibles that trigger when CET1 falls below 5.125 or 7 percent. Then Tier 2, mostly dated subordinated debt, which only absorbs loss in a gone-concern.
   5. That distinction between going-concern and gone-concern capital is the whole logic of the tiering, and it's the sentence that shows you understand it rather than having memorised a list.
   6. The 2023 reality check: Credit Suisse's AT1 was written down in full while shareholders received value in the UBS transaction. That inverted the expected hierarchy and repriced the whole AT1 market, and it's a live example of how gone-concern capital behaves under political pressure.
   7. Indian specifics: RBI requires CET1 of 5.5 percent, and Indian public sector banks have historically carried large DTAs and government recapitalisation bonds, so the deduction rules have a bigger effect on reported CET1 there than the headline ratio suggests.

   Where candidates lose it

   Listing what's included and skipping the deductions. The deductions are where CET1 differs from book equity, and goodwill plus DTA are the two that matter most. The answer that stands out explains going-concern versus gone-concern capital as the reason for the tiering.

   Expect next

   • Why is goodwill deducted?
   • What is an AT1 CoCo and when does it convert?
   • What did the Credit Suisse AT1 write-down change?
3. 055What are risk-weighted assets, and how are they computed?Regulatory capitalCoretechnicalRegulatory reportingBank credit risk

   Say this

   RWAs are the denominator of the capital ratio: exposures scaled by how risky they are. You compute them separately for credit, market and operational risk and add them up. A sovereign bond might carry a zero weight and an unsecured corporate loan 100 percent, so the same balance sheet size can imply very different capital.

   Then walk it

   1. Credit risk RWA, standardised approach: exposure times a prescribed weight by counterparty type and rating. Cash and most domestic sovereign zero, banks 20 to 100 depending on rating, residential mortgages 35 or lower under the revised rules, unrated corporates 100, and some specialised lending at 150.
   2. Credit risk RWA, internal ratings based: you feed your own PD, LGD and EAD into the Basel formula, which computes a 99.9 percent one-year unexpected loss and multiplies by 12.5. Same idea, but the weight is derived from your models rather than a table.
   3. Market risk RWA covers the trading book, now under FRTB with a sensitivities-based standardised approach or an internal models approach built on expected shortfall.
   4. Operational risk RWA under the standardised measurement approach: a Business Indicator Component from income and balance sheet size, scaled by an internal loss multiplier from your own ten-year loss history.
   5. Then the capital ratio is CET1 divided by total RWA. So there are two ways to improve it: raise capital or shrink RWA. RWA optimisation, shifting to lower-weighted assets, buying protection, improving collateral documentation, is a whole industry and a legitimate one within limits.
   6. The criticism: RWA density varies enormously across banks with similar books, largely because of IRB model differences. A European bank might run RWAs at 30 percent of total assets and a US bank at 60 for comparable risk. That comparability failure is why Basel IV added an output floor.
   7. Rough feel for scale: for a typical commercial bank, total RWA runs 50 to 70 percent of total assets, with credit risk 80 to 90 percent of the RWA total. Market risk is usually small unless there's a real trading book.

   Where candidates lose it

   Explaining the weights and never mentioning that banks can and do manage RWA down. An interviewer wants to hear both that RWA optimisation is a real activity and that its abuse is why the output floor exists. Also know the rough RWA-to-assets ratio, because it makes the number concrete.

   Expect next

   • How would a bank legitimately reduce its RWAs?
   • Why do RWA densities differ so much between banks?
   • What proportion of RWAs is credit risk for a typical bank?
4. 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?
5. 057What is Basel IV, and what changed for market risk?Regulatory capitalHardsuperdayRegulatory reportingBank market risk

   Say this

   Basel IV, formally the finalisation of Basel III, is about comparability rather than more capital. The headline is the 72.5 percent output floor on internally modelled RWA. For market risk it's FRTB, which replaced VaR with expected shortfall and drew a much harder line between trading and banking book.

   Then walk it

   1. The output floor: total RWA can't fall below 72.5 percent of the standardised calculation, phased in over several years. It caps the benefit of internal models and restores comparability between banks, which was the central complaint after 2008.
   2. Credit risk: advanced IRB removed for large corporates and financial institutions, IRB removed for equities, input floors on PD and LGD, and a more granular standardised approach with real loan-to-value sensitivity on mortgages.
   3. Operational risk: internal models abolished entirely, replaced by the standardised measurement approach driven by business indicators and your own loss history.
   4. FRTB for market risk, and the four things that changed. Expected shortfall at 97.5 percent replaces 99 percent VaR, so tail depth is captured. Liquidity horizons vary by risk factor from 10 to 120 days, so illiquid risk costs more capital.
   5. Third, non-modellable risk factors. If a factor lacks enough real price observations, you can't model it and it attracts a stress-based add-on. That was a large and unwelcome surprise for exotic and emerging market desks.
   6. Fourth, the trading and banking book boundary became prescriptive with restrictions on reclassification, ending the pre-crisis practice of moving positions to whichever book carried less capital. And the internal models approval is now at desk level with P&L attribution tests, so one desk can fail and lose modelled treatment while others keep it.
   7. Implementation dates have slipped repeatedly and differ by jurisdiction, with the US, UK and EU all on different timelines and different versions, especially for FRTB internal models. That fragmentation is itself a live commercial issue for global banks.
   8. The fair criticism: the aggregate capital impact is modest but very unevenly distributed, falling hardest on European banks with big IRB books and on trading desks in illiquid products. And the complexity it adds runs against the original goal of simplicity.

   Where candidates lose it

   Treating Basel IV as just higher capital requirements. The theme is comparability and constraining internal models, not level. And for market risk you need FRTB's specifics: expected shortfall, liquidity horizons, non-modellable risk factors and the desk-level P&L attribution test. Naming only the first shows shallow reading.

   Expect next

   • Why did FRTB move to expected shortfall?
   • What is a non-modellable risk factor and what does it cost?
   • What happens when a desk fails P&L attribution?
6. 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.