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CS Professional · Banking and Insurance - Laws and Practice · Risk Management in Banks and Basel Accords

At Narmada Bank, a clerk fraudulently transferred funds by exploiting a gap in the maker-checker control, causing a Rs 12 lakh loss. Under Basel's definition of operational risk, which statement is correct?

It is operational risk. Basel defines it as loss from inadequate or failed internal processes, people and systems, or external events. Internal fraud exploiting a weak control fits this definition, and there is no minimum loss size relative to capital.

  1. AIt is operational risk, being loss from inadequate or failed internal processes, people and systems or from external eventsCorrect
  2. BIt is credit risk because money was lost
  3. CIt is market risk because balance sheet values changed
  4. DIt is operational risk only if the loss exceeds the bank's Tier 1 capital

Explanation

Basel defines operational risk as loss resulting from inadequate or failed internal processes, people and systems, or external events. Internal fraud through a control gap fits squarely. There is no size threshold, so the last option is wrong, and no borrower default or price movement is involved.

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