Financial Risk Management Operational Risk Management 1 — Questions and Answers
Question 1: According to Basel III, operational risk is defined as the risk of loss resulting from:
- Adverse market movements in interest rates or equity prices
- Inadequate or failed internal processes, people, systems, or external events (Correct answer)
- Credit defaults by borrowers or counterparties
- Liquidity shortfalls during market stress periods
Correct answer: Inadequate or failed internal processes, people, systems, or external events
Basel defines operational risk as losses from failed or inadequate internal processes, people, and systems, or from external events such as fraud or natural disasters.
Question 2: Which of the following is an example of an internal fraud operational risk event?
- A client suing the bank for mis-selling a financial product
- A hurricane destroying a bank's data center
- A rogue trader exceeding authorized position limits to conceal losses (Correct answer)
- A payment system failure causing delayed settlements
Correct answer: A rogue trader exceeding authorized position limits to conceal losses
Rogue trading involves unauthorized positions taken by an internal employee, making it an internal fraud event under Basel's operational risk taxonomy.
Question 3: The 'Standardized Approach' (SA) for operational risk capital under Basel III calculates capital based on:
- Internal loss data and scenario analysis
- A fixed percentage of gross income multiplied by a beta factor per business line
- Business Indicator components and an Internal Loss Multiplier (Correct answer)
- VaR of the operational risk loss distribution at 99.9% confidence
Correct answer: Business Indicator components and an Internal Loss Multiplier
The Basel III Standardized Approach uses a Business Indicator (BI) and, for large banks, an Internal Loss Multiplier based on historical losses.
Question 4: A Key Risk Indicator (KRI) in operational risk management is best described as:
- A threshold that triggers automatic trading halts in volatile markets
- A metric that provides early warning signals of increasing operational risk exposure (Correct answer)
- The maximum acceptable loss from a single operational event
- A regulatory ratio comparing operational losses to revenue
Correct answer: A metric that provides early warning signals of increasing operational risk exposure
KRIs are forward-looking metrics (e.g., staff turnover rate, system error rates) that signal rising operational risk before losses occur.
Question 5: What is a Risk and Control Self-Assessment (RCSA)?
- A third-party audit of a bank's credit risk models
- A structured process in which business units identify, assess, and rate their own operational risks and controls (Correct answer)
- A regulatory examination of a bank's operational risk capital adequacy
- An automated system that monitors real-time transaction anomalies
Correct answer: A structured process in which business units identify, assess, and rate their own operational risks and controls
RCSA engages frontline business units in identifying inherent risks, evaluating control effectiveness, and rating residual risk.
Question 6: What does 'business continuity planning' (BCP) address in operational risk management?
- Planning for future business expansion into new markets
- Ensuring critical operations can continue or quickly recover after a disruptive event (Correct answer)
- Continuous monitoring of credit risk limits across business lines
- A plan for exiting non-core business activities to reduce operational complexity
Correct answer: Ensuring critical operations can continue or quickly recover after a disruptive event
BCP identifies critical functions and establishes procedures to maintain or restore them after events like system failures, pandemics, or natural disasters.
Financial Risk Management Operational Risk Management 1
According to Basel III, operational risk is defined as the risk of loss resulting from: