FRM Part I · FRM Exam Part I · Operational Risk
A bank sells complex structured notes to retail clients who were not suitable investors. Regulators fine the bank USD 40 million and the bank pays USD 25 million in client compensation. The bank also estimates USD 100 million of lost future revenue from damaged brand and client departures. Under the Basel definition, what amount is recorded as operational risk loss, and in which category?
The operational risk loss is USD 65 million, the sum of the 40 million fine and 25 million compensation, classified under clients, products and business practices. The estimated 100 million of lost future revenue is reputational and strategic impact, which the Basel definition excludes from operational risk losses.
- AUSD 65 million, clients, products and business practicesCorrect
- BUSD 40 million, clients, products and business practices
- CUSD 165 million, clients, products and business practices
- DUSD 65 million, external fraud
Explanation
Fines (40) plus compensation (25) equal 65 million, both legal and conduct losses from improper sales, classed as clients, products and business practices. The 100 million is reputational and opportunity cost, excluded from the definition. Adding it gives 165, the wrong inclusion. Omitting compensation gives 40. The cause is the bank's own practice, not external fraud.
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