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

A bank records four events in its loss database. Event 1: a clerk's keying error causes a USD 200,000 payment to the wrong party, recovered in full after two weeks. Event 2: a customer defaults on a loan because the borrower's business fails. Event 3: a litigation settlement of USD 1.5 million for mis-selling. Event 4: a cyberattack causes USD 0.8 million of remediation costs. Under the Basel definition, how many events are operational risk events, and how should Event 1 be treated?

Three events are operational risk: the keying error, the mis-selling settlement and the cyberattack. The borrower default is credit risk. The keying error should still be recorded with a USD 200,000 gross loss and a matching recovery, since recovered events still show control weaknesses.

  1. AThree events; Event 1 is a near miss and is not recorded
  2. BThree events; Event 1 is recorded as an operational risk event with a gross loss of USD 200,000 and a recovery of USD 200,000Correct
  3. CFour events; all are operational risk events with Event 2 included as a process failure
  4. DTwo events; only Events 3 and 4 produce direct financial losses

Explanation

Event 2 is credit risk, since the default stems from the borrower's business failure. Events 1, 3 and 4 are operational (process, legal/conduct and external/systems). Event 1 should be recorded with its gross loss and the full recovery shown separately, not omitted, because recovered events still reveal control weaknesses.

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