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

A bank's operational loss data show 40 events in a year. Of these, 10 are boundary events with market risk, and the bank's policy counts boundary events as operational only when the cause is a control failure. Seven of the 10 are control failures. Gross losses are USD 2.0 million for the 30 pure events, USD 1.4 million for the 7 control-failure boundary events, and USD 0.6 million for the other 3. What total annual operational risk loss should be recorded?

The recorded operational loss is USD 3.4 million. It comprises USD 2.0 million from pure operational events plus USD 1.4 million from boundary events caused by control failures. The remaining USD 0.6 million is excluded under the policy because those events were not control failures.

  1. AUSD 2.0 million
  2. BUSD 3.4 millionCorrect
  3. CUSD 4.0 million
  4. DUSD 3.0 million

Explanation

Include pure operational events (2.0) plus boundary events caused by control failure (1.4) = 3.4 million. The 0.6 million from the other 3 events is excluded under policy. Including all gives 4.0, and 3.0 results from adding only the non-control boundary losses.

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