CRA Operational Risk Events & KRIs 3 — Questions and Answers
Question 1: A firm notices its 'system downtime hours per month' KRI is trending upward. Which Basel II event category is most directly implicated?
- Internal Fraud
- Damage to Physical Assets
- Business Disruption & System Failures (Correct answer)
- Clients, Products & Business Practices
Correct answer: Business Disruption & System Failures
Increasing system downtime directly corresponds to Business Disruption & System Failures, which covers IT and infrastructure outages.
Question 2: In the context of operational risk, what does 'near-miss' event data provide?
- Confirmed realized losses for regulatory capital calculation
- Leading indicators of potential future losses without actual loss realization (Correct answer)
- Data exclusively used for stress testing market portfolios
- Evidence of external fraud for legal proceedings
Correct answer: Leading indicators of potential future losses without actual loss realization
Near-miss events reveal vulnerabilities and control weaknesses before losses materialize, making them valuable leading indicators.
Question 3: Which of the following KRIs would be most relevant for monitoring 'Employment Practices & Workplace Safety' risk?
- Number of failed payment transactions
- Employee grievance and complaint filing rate (Correct answer)
- Volume of suspicious transaction alerts
- IT patch deployment lag time
Correct answer: Employee grievance and complaint filing rate
The rate of employee grievances directly signals workforce relations and workplace safety risks under the Employment Practices category.
Question 4: The Standardized Approach for operational risk capital under Basel II calculates capital as a percentage of:
- Total operational losses in the prior year
- Gross income segmented by business line (Correct answer)
- Risk-weighted assets across the entire balance sheet
- Net interest income only
Correct answer: Gross income segmented by business line
The Standardized Approach applies beta factors to gross income allocated to each of the eight defined business lines.
Question 5: A compliance officer reports an increase in the 'number of regulatory breaches per quarter' KRI. This is best described as:
- A lagging indicator of operational risk (Correct answer)
- A leading indicator of market risk
- A lagging indicator of credit risk
- A leading indicator of strategic risk only
Correct answer: A lagging indicator of operational risk
Regulatory breaches are lagging indicators because they reflect failures that have already occurred, rather than predicting future risk.
Question 6: Under the Loss Distribution Approach (LDA) for Advanced Measurement Approaches, frequency and severity distributions are combined using:
- Simple multiplication of expected frequency and mean severity
- Monte Carlo simulation or convolution to model aggregate loss (Correct answer)
- A fixed regulatory beta coefficient per business line
- The 99th percentile of a normal distribution only
Correct answer: Monte Carlo simulation or convolution to model aggregate loss
LDA uses Monte Carlo simulation or convolution to combine separate frequency and severity distributions into an aggregate annual loss distribution.
Question 7: A KRI dashboard shows the 'vendor SLA breach rate' rising. Which operational risk category does this most closely signal?
- Internal Fraud
- Execution, Delivery & Process Management (Correct answer)
- External Fraud
- Employment Practices & Workplace Safety
Correct answer: Execution, Delivery & Process Management
Vendor SLA failures indicate third-party and supply chain execution failures, which fall under Execution, Delivery & Process Management.
CRA Operational Risk Events & KRIs 3
A firm notices its 'system downtime hours per month' KRI is trending upward.
Which Basel II event category is most directly implicated?