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FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience

A bank fined for mis-selling products by staff who ignored internal policy records the fine and customer compensation. Under the Basel framework, which description of these losses is most accurate?

The fine and compensation are operational risk losses because the Basel definition includes legal risk, such as fines, penalties and settlements, and covers failures by people including misconduct. They are not excluded as reputational, and they do not arise from market price movements.

  1. AThey are excluded because they are reputational in nature
  2. BThey are operational risk losses, including legal risk elements such as fines and settlementsCorrect
  3. CThey are market risk losses since product values fell
  4. DThey are excluded because the staff acted deliberately

Explanation

Basel's operational risk definition includes legal risk, covering fines, penalties and settlements, and includes people-related failures such as misconduct. Deliberate conduct does not exclude the event, and the loss is not due to market price movements.

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