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CMA Final · Risk Management in Banking and Insurance · Introduction to Risk Management

Under the Basel framework, which of the following is correctly classified as operational risk, rather than credit, market or liquidity risk, for a bank?

Employee fraud caused by weak internal controls is operational risk. Basel defines operational risk as loss from inadequate or failed internal processes, people and systems or external events. Borrower delays are credit risk, bond price falls are market risk, and funding shortfalls are liquidity risk.

  1. AA corporate borrower delays repayment because its business slows down
  2. BA bank's rupee bond holdings lose value as interest rates increase
  3. CA bank suffers losses because an employee fraudulently diverts customer funds due to weak internal controlsCorrect
  4. DA bank is unable to raise funds quickly to meet maturing deposits

Explanation

Basel defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Internal fraud due to weak controls fits directly. Borrower delay is credit risk, bond price fall is market risk, and inability to fund maturing deposits is liquidity risk.

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