FRM Part I · FRM Exam Part I · Operational Risk
A bank's risk team reviews the Basel event-type categories to classify a loss. A trader enters unauthorized positions and hides the losses by falsifying records, causing a large loss to the bank. Under the Basel operational risk event-type classification, this loss is best classified as:
The loss is internal fraud. Basel classifies intentional acts by bank staff, such as unauthorized trading and falsified records to hide losses, as internal fraud. External fraud involves outsiders, and the other categories cover product or client failures and processing errors.
- AInternal fraudCorrect
- BExternal fraud
- CClients, products and business practices
- DExecution, delivery and process management
Explanation
Unauthorized activity and intentional concealment by an employee is internal fraud under the Basel event types. External fraud requires a third party acting against the bank. The other categories relate to client/product issues or processing errors, not intentional employee misconduct.
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