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ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk

Norvik Bank's board reviews risks arising from its lending. It notes that a customer default (credit risk) results mainly from a borrower's inability to pay, whereas losses from a rogue trader's unauthorised positions result from failed internal processes and people. Which classification of risk sources best describes the second risk?

The rogue trader loss is operational risk, because its source is a failure of internal controls, people or systems rather than external price movements, competitor action or funding problems. Operational risk covers losses from inadequate or failed internal processes, people and systems.

  1. AOperational risk, arising from inadequate internal processes, people or systemsCorrect
  2. BMarket risk, arising from movements in prices and rates
  3. CBusiness risk arising from competitor strategy
  4. DLiquidity risk arising from the inability to sell assets

Explanation

Losses caused by failed internal processes, people or systems, such as unauthorised trading, are classic operational risk. Market risk would involve price or rate movements and is not the source here. Liquidity risk concerns funding or asset marketability.

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