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

During a risk and control self-assessment, a manager lists these items as 'operational risks': (1) a new competitor cutting prices, (2) staff mistakenly keying a wrong payment amount, (3) a downgrade of the bank's credit rating, and (4) a fraudulent loan application by a customer using stolen identity. Which items are consistent with the Basel definition of operational risk?

Only the keying error and the stolen-identity application qualify. Operational risk covers losses from failed processes, people, systems or external events, including legal risk, but excludes strategic and reputational risk. Competitor price cuts and a rating downgrade fall outside that definition.

  1. A(2) only
  2. B(2) and (4) onlyCorrect
  3. C(1), (2) and (4) only
  4. D(2), (3) and (4) only

Explanation

Basel defines operational risk as loss from inadequate or failed internal processes, people and systems, or external events, including legal risk but excluding strategic and reputational risk. Competitor pricing is strategic and a rating downgrade is reputational or financial in nature. Keying errors (process) and identity fraud (external fraud) qualify.

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