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FRM Part II · FRM Exam Part II · Risk Measurement and Assessment

A bank classifies a loss in which a loan default was caused by the loan officer deliberately falsifying the borrower's documents to meet sales targets. The loss is recorded in the credit risk database only. Which is the most appropriate treatment under good practice for operational risk identification?

The event should be recorded as an operational risk loss and flagged as a credit boundary event. The root cause is internal fraud, an operational failure, even though the loss shows up as a loan default. Capturing it in both views with a flag avoids hiding the cause while preventing double counting of capital.

  1. ARecord it only as credit risk since the loss arose from a loan default
  2. BRecord it only as operational risk since credit risk is a market event
  3. CRecord it as operational risk as well as credit risk, flagging it as a boundary eventCorrect
  4. DExclude it from both databases because it involved fraud

Explanation

Credit-related operational losses are boundary events: the loss is driven by an operational failure (internal fraud) but materializes through credit exposure. Good practice is to capture them in the operational risk loss data with a flag, while capital treatment avoids double counting. Option A ignores the root cause.

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