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

A bank's risk team reviews losses from a flood that destroyed a branch's premises and equipment. Which Basel event type is this, and which is the correct distinction from business disruption and system failures?

The loss is damage to physical assets. Basel assigns losses from natural disasters or other events that harm premises and equipment to this category. Business disruption and system failures covers outages of systems or services, and external fraud requires intentional deceit by an outside party.

  1. ADamage to physical assets, because the loss arises from natural disasters or other events harming tangible assetsCorrect
  2. BBusiness disruption and system failures, because any natural disaster is classed there
  3. CExecution, delivery and process management, because the branch failed to prevent the flood
  4. DExternal fraud, because the cause was outside the bank

Explanation

Basel places losses from natural disasters and other events damaging physical assets in damage to physical assets. Business disruption covers losses from outages of systems or utilities, which could be a separate consequential loss. Externality alone does not make it fraud, which requires intentional deceit.

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