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CMA Final · Risk Management in Banking and Insurance · Introduction to Risk Management

A bank's payment system fails for several hours because of a software glitch, and customers incur penalties for delayed transfers which the bank reimburses. Under the Basel classification of risk, this loss is mainly attributed to which category?

The loss is operational risk from systems failure. Basel defines operational risk as loss resulting from inadequate or failed internal processes, people, systems or external events, and a software glitch that disrupts payments fits this directly. No borrower default or market price movement caused it.

  1. AOperational risk arising from systems failureCorrect
  2. BCredit risk arising from counterparty default
  3. CMarket risk arising from price volatility
  4. DInterest rate risk in the banking book

Explanation

Basel defines operational risk as loss from inadequate or failed internal processes, people and systems, or external events. A software failure is a systems failure, so the reimbursement loss is operational. No counterparty default or price movement is involved.

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