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

Under the Basel framework, a bank's staff member in Pune enters a wrong beneficiary account during a large RTGS transfer, causing a loss. How is this loss classified?

It is operational risk. Basel defines operational risk as loss resulting from inadequate or failed internal processes, people and systems or external events. A staff member entering a wrong beneficiary account is a human and process failure, not a default, price movement or funding shortfall.

  1. ACredit risk, because money was lost to a counterparty
  2. BMarket risk, because a payment was made
  3. COperational risk, arising from human error in internal processesCorrect
  4. DLiquidity risk, because funds left the bank

Explanation

Basel defines operational risk as loss from inadequate or failed internal processes, people and systems, or from external events. A staff data-entry error is a failure of people and process. No borrower default or price movement is involved, so credit and market risk do not apply.

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