FRM Part II · FRM Exam Part II · Risk Identification
A bank defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The head of risk wants to confirm which item falls within this definition under the Basel framework. Which of the following is explicitly included?
Legal risk, including fines, penalties and settlements from supervisory actions, is included. The Basel operational risk definition explicitly excludes strategic and reputational risk, and interest rate losses belong to market risk rather than operational risk.
- AStrategic risk from a poorly chosen acquisition target
- BLegal risk, including fines and settlements from supervisory actionsCorrect
- CReputational risk from negative press that reduces revenue
- DMarket losses from adverse interest rate moves
Explanation
The Basel definition includes legal risk, including exposure to fines, penalties or punitive damages. It explicitly excludes strategic and reputational risk. Interest rate losses are market risk.
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