Thermo-Credit Glossary Drill: K Terms

Explanation: CET1 is the highest-quality regulatory capital and is designed to absorb losses while a bank remains a going concern.
A: Short-term wholesale funding is a liability and can create liquidity risk; it is not capital.
B: This is correct because common equity and retained earnings form the core loss-absorbing layer, subject to regulatory adjustments.
C: A derivative notional amount measures contractual scale and is not CET1 capital.

Explanation: RWA means risk-weighted assets. The measure applies regulatory risk weights or approved model outputs so exposures with different risk characteristics are not treated as equal nominal amounts.
CET1 divided by RWA is a central capital-adequacy ratio, so an increase in RWA can consume capital headroom even when the balance-sheet total is unchanged.

Explanation: CET1/RWA slack is the distance between the actual capital ratio and the applicable constraint used in the exercise.
A: Falling below the constraint is a shortfall, not positive slack.
B: A one-year stable-funding buffer describes the horizon of NSFR, not CET1/RWA headroom.
C: This is correct because the excess ratio indicates how much room remains before the constraint binds.

Explanation: In this QTC notation, V_C denotes effective credit-capacity headroom after considering the model's capital, liquidity, risk, and policy constraints.
It is a model variable rather than a standard regulatory metric. A smaller V_C means marginal allocation decisions matter more because less additional lending capacity remains.

Explanation: In the QTC model, p_C is the shadow value associated with the credit-capacity constraint V_C.
A: This is correct because p_C measures the modeled marginal gain from a small relaxation of capacity.
B: A central-bank policy rate is an observed policy instrument, not this shadow value.
C: The monetary base is a balance-sheet stock and is not the derivative represented by p_C.

Explanation: HQLA are assets meeting regulatory quality and liquidity criteria for conversion into cash during the LCR stress period; eligibility depends on the applicable rules and conditions.
A: Qualifying high-quality government bonds can be included in HQLA.
B: Illiquid unlisted startup equity does not provide the required reliable stress liquidity.
C: Eligible central-bank reserves can be included in HQLA.

Explanation: A liquidity buffer provides assets that can be converted into cash when stressed outflows arrive or normal funding channels weaken.
A: Maximizing leveraged exposure would consume liquidity and increase risk rather than provide a buffer.
B: This is correct because the buffer buys time and reduces forced sales or failed rollovers.
C: Long-term R&D funding is a financing purpose, not the immediate function of a liquidity buffer.

Explanation: LCR compares the stock of eligible HQLA with total net cash outflows under a specified 30-calendar-day stress scenario.
A: Net interest margin measures lending and funding profitability, not short-term liquidity coverage.
B: A Tier 1 leverage ratio is a capital measure and does not use stressed cash outflows as its denominator.
C: This is the ratio structure described by LCR.

Explanation: NSFR compares available stable funding with required stable funding over a one-year horizon to limit structural funding mismatch.
A: This is correct because the measure asks whether longer-lived and less-liquid assets have sufficiently stable funding.
B: Intraday payment throughput is an operational payment-system measure.
C: Equity risk premium is a market-return concept, not a bank stable-funding ratio.

Explanation: The expected phrase in this QTC glossary is "money-in-circulation", meaning the monetary stock treated as actively moving through transactions in the model.
This is model terminology rather than a universal official statistical aggregate. It should not be assumed to equal the monetary base or every deposit balance without an explicit measurement definition.

Explanation: Stocks are measured at a point in time, while flows are measured over an interval and can change the corresponding stock.
A: This reverses the definitions of stock and flow.
B: This is correct because outstanding balances are stocks and period transactions or changes are flows.
C: Treating the definitions as identical would mix levels with changes and produce invalid comparisons.

Explanation: Margin credit finances securities positions against collateral and therefore increases both potential gains and potential losses relative to the investor's equity.
A: Long-term plant expansion is corporate investment finance, not the usual purpose of margin credit.
B: A letter of credit supports trade-payment obligations.
C: This is correct because borrowed funds are used to obtain leveraged market exposure.

Explanation: Commercial paper is a short-term unsecured debt instrument used by issuers for working-capital and other near-term funding needs.
A: This is correct because CP is debt, is generally unsecured, and has short maturity.
B: A mortgage-backed security is backed by mortgage cash flows and can have a much longer maturity.
C: Equity issuance represents ownership capital rather than a debt promise.

Explanation: W_policy is defined in this QTC glossary as an external policy intervention that changes conditions in the modeled credit system.
A: Random market variation is endogenous noise or market movement, not an identified policy intervention.
B: This is correct because an asset-purchase program is a deliberate central-bank action.
C: A user device's power state has no role in the stated credit model.

Explanation: A MECE partition aims for categories that do not overlap and that collectively cover the population being allocated.
A: MECE does not by itself maximize entropy; entropy depends on the resulting distribution.
B: Deliberate overlap would double-count observations and violates mutual exclusivity.
C: This is correct because avoiding overlap and gaps supports interpretable allocation shares.

Explanation: In the idealized model, a state variable is determined by the specified current state rather than by the path used to reach it.
A: Dependence on the entire history describes a path-dependent quantity.
B: This is correct within the model's state description.
C: State variables are not limited to physical temperature, although applying the analogy to finance requires explicit definitions and empirical validation.

Explanation: A non-zero closed-loop area indicates that the response on the return path differs from the outward path, which is the pattern used here as a hysteresis indicator.
A: This is correct because the loop records path-dependent behavior over a cycle.
B: A perfectly reversible transformation would retrace the same path and enclose no area.
C: A constant p_C alone does not establish the stated loop behavior.

Explanation: Early-warning practice combines forward-looking scenario analysis with monitoring of observed capital, liquidity, funding, and market indicators.
A: Stress-scenario capital depletion can reveal vulnerability before the losses occur.
B: Unrelated movie ratings provide no evidence about the stated financial risks.
C: Deteriorating liquidity coverage can signal increasing short-term funding vulnerability.

Explanation: The credit-first perspective used here focuses on how bank lending creates deposits and on the sectors and purposes receiving that credit.
A: Treating base money as the sole driver omits bank credit creation and its institutional constraints.
B: Ignoring composition would remove the allocation question central to this perspective.
C: This is correct because both credit creation and use categories matter to the framework.