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

Tulsi Bank has a Rs 40 crore loan portfolio where a Rs 2 crore loan is secured by a guarantee that is later found to have been forged by a bank employee in collusion with the borrower. Which risk event classification best applies, and what is the key point?

It is operational risk, because the loss results from internal fraud involving an employee and a forged guarantee, which is a failure of people and processes. It is not market risk from price moves or liquidity risk from a cash shortfall.

  1. AOperational risk, because the loss arises from internal fraud, a failure of people and processesCorrect
  2. BMarket risk, because the value of collateral fell
  3. CLiquidity risk, because the bank lacked cash
  4. DStrategic risk only, because it affects the bank's reputation

Explanation

Operational risk covers losses from inadequate or failed internal processes, people, systems or external events, and includes internal fraud. The loss stems from employee collusion and forgery, not from price movements or cash shortage. Credit risk may also be touched, but the root cause is internal fraud, making operational risk the best fit.

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