Explanation:
The "dark side" of retail risk management refers to wild-card risks, including systemic effects, macroeconomic sensitivity, and the unpredictability of innovative products without historical data. Because these risks are difficult or impossible to quantify with a precise "risk number" (making A incorrect), banks must use stress testing and scenario analysis to gauge the potential devastation of plausible worst-case scenarios (C is correct). Completely avoiding new risks (B) is neither practical nor conducive to business growth. Additionally, "qualified mortgages" are defined precisely by demonstrating a borrower's ability to repay, representing lower risk rather than higher risk (making D incorrect).
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603.2. Crouhy argues¹ that the dark side of retail risk management has four primary causes: innovate products lack historical loss data; sensitivity to the macroeconomic environment; consumer defaults are social-legal phenomena; and systemic effects due to operational issues.
Which measure(s) attempt to address the problem of the dark side of retail risk management?
A
Banks should attempt to assign a risk number to these types of wild-card risks
B
Banks should avoid these new types of risks such that they are excluded from the retail portfolio
C
Banks should use stress tests to gauge how devastating each plausible worst-case scenario might be.
D
Banks should allocate (or originate) less than 15.0% of their total mortgage loan portfolio to "qualified mortgages" which are deemed riskier according to quantitative and qualitative criteria; ie, qualified mortgages by definition do not demonstrate "ability to repay"
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