FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience
A bank's payment system fails after a faulty software update, halting customer payments for six hours. Customers are compensated for fees and the bank pays a regulatory penalty. Separately, the bank's data center is flooded in a storm. Which statement about classifying these two events is correct under the Basel taxonomy?
The software failure is business disruption and system failures, while the flood is damage to physical assets. Basel classifies system and software failures under the former and losses to physical assets from natural disasters under the latter, since events are classified by their cause.
- ABoth are business disruption and system failures
- BThe software failure is business disruption and system failures, and the flood is damage to physical assetsCorrect
- CThe software failure is execution, delivery and process management, and the flood is business disruption and system failures
- DBoth are damage to physical assets
Explanation
Basel places failures of hardware or software and telecommunications outages under business disruption and system failures. Losses from natural disasters or other events damaging physical assets fall under damage to physical assets. Business disruption could arise as a consequence of the flood, but the cause-based classification of the flood itself is damage to physical assets.
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