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FRM Part II · FRM Exam Part II · Risk Measurement and Assessment

A bank's operational risk team is building a loss event taxonomy. A trader enters unauthorized positions beyond his limits and hides the losses by falsifying trade records. Under the Basel event-type classification, into which category should the resulting loss be placed?

The loss belongs in internal fraud. The trader, an employee, intentionally exceeded limits and falsified records to hide losses. Basel defines internal fraud as intentional misappropriation or circumvention of policy involving at least one internal party, whereas process management failures involve unintentional errors.

  1. AInternal fraudCorrect
  2. BExternal fraud
  3. CExecution, delivery and process management
  4. DClients, products and business practices

Explanation

Basel event types classify losses by cause. Unauthorized trading and deliberate concealment by an employee is an intentional act involving at least one internal party, so it is internal fraud. External fraud requires a third party perpetrator, and process management covers unintentional errors.

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