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FRM Part II · FRM Exam Part II · Digital Resilience and Financial Stability: The Quest for Policy Tools in the Financial Sector

A supervisor argues that digital transformation changes the nature of operational risk in finance compared with traditional disruptions such as a branch flood. Which feature best supports this argument?

The best support is that interconnected digital systems allow one cyber incident to spread rapidly across institutions and markets. Shared infrastructure and dependencies make disruptions correlated and systemic, unlike localized physical events, so firm-level capital alone cannot fully address them.

  1. ADigital disruptions are always smaller in scale because systems are automated
  2. BInterconnected digital systems let a single cyber incident propagate quickly across institutions and marketsCorrect
  3. CDigital incidents affect only the institution's own balance sheet liquidity ratios
  4. DDigital risks are fully diversifiable by holding more capital at each institution

Explanation

Interconnection and shared infrastructure allow incidents to spread rapidly and across firms, creating systemic effects. Option A is wrong because scale can be larger, and risks are not fully diversifiable through firm-level capital alone.

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