Risky Businesses Trivia Quiz

Answer: Basel

The committee meets four times a year at the Bank for International Settlements in Basel, Switzerland. The Basel norms deal with the different types of risks that banks have to face and lay down regulatory guidelines that can be followed on a global scale. Most countries require their banks to follow the Basel norms, which are updated periodically.

Answer: Credit Risk

Credit risk generally means the possible inability of a borrower to make repayments either on time or at all. Lenders try to minimize the potential loss by buying credit insurance in the form of credit default swaps (CDS) or stating certain covenants at the time of sanctioning the loan that the borrower will have to comply with.

In CDSs, the risk is transferred from the person giving the loan to the person selling the insurance against default.

Answer: Junk bonds

While each agency may have a different scale, bonds or companies rated AAA (or its equivalent) are considered to have the highest degree of credit worthiness and the risk increases progressively from AA to C. A rating of D signifies that the company has defaulted on its repayment in the past. Junk bonds typically offer higher returns than other better rated bonds due to the greater risk that they carry.

Answer: The exact date on which construction is slated to begin.

In project loans, the main source of repayment is generally the cashflow generated by the project itself. Hence any reduction in the actual vehicular traffic and toll as compared to the amount estimated by the company in its projections will hamper the company's repayment capacity.

If the project is stuck due to pending approvals from the authorities concerned, the company may not be able to meet its earlier timelines and you may have to extend the tenure of the loan to help the company repay the loan.

Since the entire project depends on the company's ability to successfully construct the bridge within the stipulated period, it is essential to check if the company has been able to satisfactorily execute similar projects in the past to gauge its capability.

Projects rarely have an exact start date specified since numerous factors may affect this. Usually a tentative date is sufficient for the appraisal process.

Answer: The board of directors of the company.

It's important to keep an eye on the overall portfolio of the bank to ensure that it is not unduly skewed towards any particular industry or region. This helps to safeguard against a downturn in any particular industry which is part of the normal business cycle. Regional concentration risk arises mainly from the possibility of any environmental disaster striking a particular region crippling the businesses operating there.

Any kind of risks concerning the board of directors (whether their integrity or capability) fall under management risk.

Answer: All the lenders have equal charge over the security.

'Pari passu' is a Latin term that translates to 'equal footing'. If all the lenders have pari passu charge on the assets pledged by the borrower, it means all of them have equal rights of repayment. In case of a default, the assets can be sold and all the lenders will have equal rights on the proceeds of the sale.

Answer: Currency risk

Since there is generally a time lag between placing orders and receiving the delivery, the exchange rate of the two currencies may not remain the same. If there's a drastic change, the order may even become unfeasible for one of the parties. Some companies enter into contracts to hedge this risk, thus limiting any potential loss.

Answer: Greece

The deteriorating condition of the Greek economy sparked fears that it will be unable to service its debt in 2009. In April 2010, Standard & Poor downgraded the credit rating of Greece to junk status amidst concerns regarding its financial stability and the high deficit between the country's income and expenditure. Being a part of the European Union, Greece has limited control over its monetary policy and is unable to depreciate its currency - a common tool used in similar circumstances by other countries in the past. Eventually a 110 billion euro loan bailout funded by Germany and other European Union countries along with the International Monetary Fund helped Greece tide over the crisis.

Other countries where similar concerns were raised during the same period were Portugal, Spain and Ireland.

Answer: Yes

A bank (or any other entity) can issue a catastrophe bond as a form of insurance against natural disasters. Investors willing to take the risk can purchase the bond and earn the return promised. If the disaster does strike, then investors have to forfeit the amount paid for purchasing the bond and the money is used by the bank to make up for its losses.

Answer: Systemic Risk

Systemic risk refers to the collapse of the financial system as a whole. Since there is a great degree of interlinkage and interdependence within the financial system, a failure of one of the big banks or financial institutions can have a cascading ('domino') effect on the others destabilizing the entire industry.

The US subprime mortgage crisis of 2008 and the ensuing global financial crisis is an example of systemic risk. Even regular de-risking strategies like portfolio diversification and hedging can't reduce the inherent systemic risk.