Module: | MODULE B: RISK MANAGEMENT
Q269: Scenario: XYZ Bank is planning to launch a highly complex, new derivative product for its corporate clients next quarter. The Risk Management Department (RMD) is initiating the first phase of the basic risk framework. Based on the guidelines for Risk Identification, consider the following statements regarding the correct regulatory actions:
1. The bank must completely map and identify all potential market, credit, and operational risks associated with the new product strictly before its official market launch.
2. The Risk Identification phase can be prudently postponed until after the product achieves a minimum sales threshold of ₹50 crore to avoid unnecessary initial evaluation costs.
3. Identifying the risk pre-facto allows the bank to establish appropriate exposure limits and risk-pricing models before any actual capital is committed to the market.
Which of the statements given above is/are correct?
2. The Risk Identification phase can be prudently postponed until after the product achieves a minimum sales threshold of ₹50 crore to avoid unnecessary initial evaluation costs.
3. Identifying the risk pre-facto allows the bank to establish appropriate exposure limits and risk-pricing models before any actual capital is committed to the market.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is correct: Risk Identification is the foundational first step of the basic risk framework.
Regulatory norms strictly mandate that before any new product, service, or business line is launched, all inherent risks (credit, market, liquidity, operational, legal) must be comprehensively mapped out.
Statement 2 is incorrect: Postponing risk identification until a sales target is reached is a catastrophic compliance failure.
Risks must be identified "pre-facto" (before the fact). Waiting until ₹50 crore is deployed means the bank is operating blindly and could suffer massive unexpected losses.
Statement 3 is correct: The entire purpose of identifying risks before launch is to establish the necessary safeguards.
Once the risk profile is known, the bank can set stop-loss limits, calculate the required risk premium for pricing, and allocate the necessary economic capital before any real money is put at risk.
Regulatory norms strictly mandate that before any new product, service, or business line is launched, all inherent risks (credit, market, liquidity, operational, legal) must be comprehensively mapped out.
Statement 2 is incorrect: Postponing risk identification until a sales target is reached is a catastrophic compliance failure.
Risks must be identified "pre-facto" (before the fact). Waiting until ₹50 crore is deployed means the bank is operating blindly and could suffer massive unexpected losses.
Statement 3 is correct: The entire purpose of identifying risks before launch is to establish the necessary safeguards.
Once the risk profile is known, the bank can set stop-loss limits, calculate the required risk premium for pricing, and allocate the necessary economic capital before any real money is put at risk.