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

A bank's risk team reviews four events from last quarter. Which event should be recorded as an operational risk event rather than excluded as outside the regulatory definition?

The external wire fraud that exploited weak authentication is the operational risk event, since it results from failed systems and controls plus an external event. The others are strategic, reputational or credit risk and fall outside the operational risk definition.

  1. AA fall in revenue after a competitor launches a cheaper product
  2. BA decline in the bank's share price after negative press about its strategy
  3. CA wire fraud by an external party that bypassed weak authentication controls, causing a USD 3 million lossCorrect
  4. DA loss on a loan portfolio because borrowers defaulted during a recession

Explanation

External fraud exploiting control weaknesses is a failed process or system combined with an external event, so it is operational risk. Competitor-driven revenue decline is business/strategic risk, a share price fall from press is reputational, and recession loan defaults are credit risk.

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