CAIIB · Bank Financial Management · Module B — Risk Management
CAIIB BFM Unit 12 — Risks in Banking Business: Free MCQs with Explanations
By Swarnakshi Jha (ex-banker) · Updated 29 October 2026 · Paper II of the December 2026 cycle (Saturday 12 December 2026)
This is the free practice page for CAIIB BFM Unit 12 — Risks in Banking Business (Module B — Risk Management). The CAIIB Mock Centre holds 186 questions on this unit alone, every one with a why-right / why-wrong explanation; below are the facts examiners keep returning to, five practice questions with explanations, and the traps that cost marks.
BFM · Module B186 MCQs in the Mock Centre5 free belowPaper on 12 December
Key facts examiners test from this unit
Risk identification in banking business — banks run eight Basel II business lines with one goal, risk-adjusted expected return, and group them under three heads for risk management.
Banking book, trading book, off-balance-sheet — the banking book is held to maturity on accrual with no market risk; the trading book is marked to market and sold; off-balance-sheet promises can carry all five risks.
Liquidity and interest rate risk — liquidity risk is not getting funds at a reasonable rate; interest rate risk is rates moving against NII, NIM or the market value of equity.
Changed since the textbook
Banks still kept out of commodity derivatives trading (4 May 2026). SEBI's chairman said the banking and insurance regulators are not in favour of letting their regulated entities into commodity derivatives. Banks may act only as clearing members in commodity derivatives, not trade on their own account. Source: Moneylife
Repo rate cut to 5.25% (5 Dec 2025). The MPC cut the policy repo rate by 25 basis points to 5.25%; it was unchanged on 30 June 2026. The RBI Act requires the MPC to meet at least four times a year (RBI's calendar has six), and the rate can also change at an unscheduled meeting, as on 4 May 2022 (4.00% to 4.40%). Source: Business Standard
5 free practice questions — tap an option
Five practice questions from this unit. Answers lock on the first tap, exactly as in the exam, and an explanation opens underneath. The Mock Centre has all 186 questions on this unit, from easy to tough, with caselets and key-in numericals, why every other option is wrong and the exam tip — and tracks your score and revision dates.
Question 1 of 5
Escrow, depository receipts, securities lending for customers, corporate actions, and issuer and paying agents belong to:
Why (d): These are the activities of agency services (custody, corporate agency, corporate trust). (a) is wrong: Trading and sales covers dealing in securities and currencies. (b) is wrong: Retail banking covers lending, deposits and cards. (c) is wrong: Payment and settlement covers payments and clearing.
Question 2 of 5
Under the accrual system of accounting:
Why (b): Under accrual accounting, income is recognised when it is earned and expenses when they are incurred, whether or not cash has changed hands in the period; recording on receipt or payment is the cash basis. Daily marking to market is a valuation rule for trading positions. (a) is wrong: That is the cash basis. (c) is wrong: That is the cash basis for expenses. (d) is wrong: Daily market valuation is mark-to-market, a trading-book practice.
Question 3 of 5
On the day a bank issues a guarantee:
Why (d): The textbook says there is no cash outflow on the day such commitments are issued. (a) is wrong: Payment arises only if the customer later fails to meet his obligation. (b) is wrong: No funding is needed on the day of issue. (c) is wrong: The guarantee is a contingent, off-balance-sheet item.
Question 4 of 5
Under the current investment norms, AFS securities are fair valued at least quarterly, and their gains and losses go to:
Why (b): AFS gains and losses go to an AFS-Reserve that counts as CET1; unrealised gains in it cannot be paid out. (a) is wrong: Daily fair valuation through profit and loss applies to HFT. (c) is wrong: The CRR is a reserve kept with RBI. (d) is wrong: AFS securities are fair valued.
Question 5 of 5
Market risk is also referred to as:
Why (c): The textbook says market risk is also referred to as price risk. (a) is wrong: Default risk is another name for credit risk. (b) is wrong: Call risk is a liquidity risk. (d) is wrong: Integrity risk is another name for compliance risk.
0 of 5 answered.
Traps in this unit
Project finance is commercial banking, not corporate finance.
No MTM does not mean no risk.
Contingent asset example: insurance with the bank as beneficiary.
Practise all 186 questions on Unit 12. The free CAIIB demo opens Units 1–2 of every paper with full explanations; the BFM Online Mock Centre unlocks all 7,600+ BFM questions, the full-length papers with caselets and key-ins, module mocks and Smart Revision for 18 months (₹1,499).
Independent study aid — not affiliated with, endorsed by, or sponsored by the Indian Institute of Banking & Finance (IIBF). Exam pattern, dates, fees and passing criteria are set by IIBF — always confirm the current rules at iibf.org.in. CAIIB content follows rules and developments up to IIBF's cut-off of 30 June 2026 (where a rule changed later, the update box says so); verify from official sources before relying on them in practice.