Operational Risk Framework Flashcards
6 cards from real Financial Risk Management practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Operational Risk Framework flashcards as text
How is operational risk defined under the Basel framework?
Answer: The risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events
Basel II's definition of operational risk explicitly includes internal fraud, external fraud, employment practices, clients, damage to physical assets, system failures, and execution/delivery errors.
Which of the following is an example of 'internal fraud' as an operational risk event type under Basel?
Answer: A rogue trader concealing losses by falsifying trade records
Internal fraud involves intentional misappropriation of assets or circumvention of regulations by at least one internal party, such as a rogue trader like the Barings/Nick Leeson case.
What is the 'Basic Indicator Approach' (BIA) for operational risk capital under Basel?
Answer: Capital = 15% × average annual gross income over the past three years
The BIA requires banks to hold operational risk capital equal to 15% of their average positive annual gross income over the previous three years, using gross income as a proxy for risk exposure.
What is a 'Key Risk Indicator' (KRI) in operational risk management?
Answer: A metric that provides early warning signals of increasing operational risk exposure
KRIs are forward-looking metrics (e.g., staff turnover, system downtime, error rates) that signal when operational risk is rising before a loss event actually occurs.
What is a 'Risk and Control Self-Assessment' (RCSA) in operational risk?
Answer: A structured process where business units identify and evaluate operational risks and the effectiveness of existing controls
RCSAs are conducted periodically by front-line staff and risk managers to document risks, assess their likelihood and impact, and rate the strength of mitigating controls.
What is the purpose of maintaining an 'internal loss database' (ILD) for operational risk?
Answer: To capture historical operational loss events so they can be analyzed and used to calibrate operational risk capital models
An ILD records date, event type, business line, gross loss, and recovery for each operational loss, providing empirical data for frequency and severity distributions in advanced measurement approaches.
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