FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience
A bank's risk team is classifying loss events under the Basel definition of operational risk, which covers losses from inadequate or failed internal processes, people and systems, or from external events. Which of the following events would be EXCLUDED from the Basel regulatory definition of operational risk?
Reputational damage is excluded from the Basel regulatory definition of operational risk, which includes legal risk but not strategic or reputational risk. Rogue trading, a flood disrupting settlement and regulatory fines are all covered as people, external event or legal losses.
- AA loss from a rogue trader exceeding authorised limits
- BA loss from a data-centre flood that halts settlement
- CReputational damage from a decline in customer confidence following a data breach, with no direct financial loss recordedCorrect
- DA fine imposed by a regulator for a compliance failure
Explanation
The Basel definition includes legal risk (fines, settlements) but excludes strategic and reputational risk. Reputational damage with no direct loss recorded falls outside the definition. Rogue trading, floods and regulatory fines are all inside it as people, external event and legal risk losses.
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