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FRM Part II · FRM Exam Part II · Risk Measurement and Assessment

A risk manager is reviewing how the bank defines operational risk for its taxonomy. Which of the following losses should be excluded from the Basel definition of operational risk?

The failed acquisition is excluded. The Basel definition of operational risk covers losses from failed processes, people, systems or external events, including legal risk, but excludes strategic and reputational risk. A disappointing acquisition is a strategic outcome, while legal settlements, floods and rogue trading all fall within operational risk.

  1. ALoss from a legal settlement over a mis-sold product
  2. BLoss from a flood damaging a branch
  3. CLoss from a strategic acquisition that failed to deliver expected synergiesCorrect
  4. DLoss from an employee's unauthorized trading

Explanation

The Basel definition covers losses from inadequate or failed internal processes, people and systems, or external events, and includes legal risk. It excludes strategic and reputational risk. A failed acquisition is a strategic risk. The other three are legal, external event and internal fraud losses, all in scope.

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