GARP FRR Cheat Sheet: Loss, Market Risk and Bank Funding
Review FRR expected loss, rate sensitivities, VaR/ES, control responsibilities, liquidity ratios and risk-adjusted return with compact worked examples.
Use this original quick reference after reading the assigned GARP materials. It is not an official formula sheet or a complete syllabus. Identify the framework, units and horizon before using a formula.
Credit loss and exposure
For a simple single-period model with aligned inputs:
\[ \mathrm{EL}=\mathrm{PD}\times\mathrm{LGD}\times\mathrm{EAD} \]If PD is 2%, LGD is 40% and EAD is $1,000,000, expected loss is $8,000. With recovery measured on the same basis, LGD is one minus recovery. Keep default probability distinct from loss severity and exposure; expected loss is not a maximum loss or a capital requirement. A derivative’s notional is not automatically its counterparty exposure.
| Check | Common error |
|---|---|
| Exposure and maturity | Applying a one-year PD to an incompatible horizon without adjustment. |
| Recovery and collateral | Treating collateral value as certain recoverable cash without enforceability, costs or timing. |
| Portfolio dependence | Assuming adding borrowers removes common-factor concentration. |
| Risk transfer | Treating a hedge as eliminating counterparty, basis and settlement risks. |
Rates, bond value and FX
A basis point is 0.0001 in decimal rate units. For a small yield change, ignoring convexity:
\[ \frac{\Delta P}{P}\approx-D_{\mathrm{mod}}\,\Delta y \]For a $10,000,000 position with modified duration 4, a 10-basis-point rise gives an approximate $40,000 decline: 10,000,000 × 4 × 0.001. Its approximate PV01 magnitude is $4,000 per basis point. State whether a sensitivity is signed or quoted as a positive magnitude; larger shocks and embedded options can make the simple approximation less reliable.
For FX, write “currency B per unit of currency A” before calculating. A rise in that quotation increases A’s value in B terms. Forward pricing also needs maturity, interest/carry conventions and both currencies; a forward premium alone is not a prediction of a future spot rate.
VaR and expected shortfall
| Measure | Interpretation | Does not establish |
|---|---|---|
| VaR | A loss quantile at a stated confidence and horizon. | A maximum possible loss or the average size of tail losses. |
| Expected shortfall | Average tail loss under the stated definition and distribution. | A guarantee against liquidity, model or estimation risk. |
| Back-testing | Comparison of forecasts with realized results under a specified test. | Proof that the model remains reliable in a new regime. |
For independent, identically distributed returns with the required scaling assumptions, square-root-of-time scaling may be used. It is not a universal rule for nonlinear portfolios, serial dependence or changing volatility. Check whether losses are reported as positive amounts or returns are reported with signed gains/losses.
Operational risk: connect evidence to accountability
- Management owns and manages risk; risk/compliance provides oversight and challenge; internal audit provides independent assurance.
- Distinguish an actual loss from a near miss, a gross loss from a net loss, and a control indicator from a performance indicator.
- An RCSA category is not automatically a cardinal expected-loss number. Ratings need defined scales and evidence.
- Insurance and outsourcing can change exposures but do not automatically transfer management accountability.
- Identify whether a capital question uses historical BIA/TSA/ASA/AMA or the current standardized framework. Do not move inputs or coefficients between frameworks.
Liquidity and balance-sheet sensitivity
Under the stated regulatory definitions:
\[ \mathrm{LCR}=\frac{\text{eligible HQLA}}{\text{30-day net cash outflows}} \]Eligible HQLA of $120 million and defined net outflows of $100 million give 120%. “Eligible” matters: asset haircuts, composition limits and the inflow cap can change the numerator or denominator. A ratio calculated from a list of gross inflows/outflows without those conventions may be wrong. LCR is a short-horizon stress metric, not proof of survival in every scenario.
NSFR compares available stable funding with required stable funding over its longer structural funding perspective. It is not the same denominator as LCR. Confirm the relevant jurisdiction’s implementation; Basel standards do not become national law automatically.
For a simplified positive repricing gap with unchanged balances and consistent repricing assumptions, a rate rise may increase net interest income. That statement does not determine economic value: earnings and value measures have different horizons, discounting and behavioural assumptions. Contractual ladders can differ from actual cash flows because of withdrawals, prepayments and optionality.
Risk-adjusted return and transfer pricing
Using a stated definition:
\[ \mathrm{RAROC}=\frac{\text{risk-adjusted income}}{\text{economic capital}} \]Risk-adjusted annual income of $1.8 million divided by $15 million economic capital gives 12%. Compare it with a compatible hurdle; clarify taxes, expected-loss deductions and allocated costs. Do not substitute regulatory capital for economic capital unless the case defines that convention.
Matched-maturity funding transfer pricing attributes funding costs/benefits using the relevant tenor and liquidity characteristics. A single average bank funding rate may hide a long-term loan’s funding contribution. FTP allocation is not itself an external cash flow or proof that all risks have been priced.
Before choosing an answer
Ask: What is the measure? Which facts and assumptions decide it? What remains uncertain? Use Official Resources for the controlling guide and regulatory references, then test with free practice . Practice scores are not official pass predictions.