Financial Risk Management Operational Risk Framework

Question 1

How is operational risk defined under the Basel framework?

Accepted Answer

The risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events

Answer

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.

Question 2

Which of the following is an example of 'internal fraud' as an operational risk event type under Basel?

Accepted Answer

A rogue trader concealing losses by falsifying trade records

Answer

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.

Question 3

What is the 'Basic Indicator Approach' (BIA) for operational risk capital under Basel?

Accepted Answer

Capital = 15% × average annual gross income over the past three years

Answer

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.

Question 4

What is a 'Key Risk Indicator' (KRI) in operational risk management?

Accepted Answer

A metric that provides early warning signals of increasing operational risk exposure

Answer

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.

Question 5

What is a 'Risk and Control Self-Assessment' (RCSA) in operational risk?

Accepted Answer

A structured process where business units identify and evaluate operational risks and the effectiveness of existing controls

Answer

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.

Financial Risk Management Practice Test

Financial Risk Management Practice Test

Financial Risk Management Operational Risk Framework