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FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience

Which item is explicitly included within, rather than excluded from, the Basel regulatory definition of operational risk?

Legal risk is included. The Basel definition of operational risk covers legal risk, including fines, penalties and settlements from supervisory actions, while explicitly excluding strategic and reputational risk. Trading book value declines are market risk, not operational risk.

  1. ALegal risk, including exposure to fines and penalties from supervisory actionsCorrect
  2. BStrategic risk from a poorly chosen business plan
  3. CReputational risk arising from negative publicity
  4. DRisk of loss from a decline in the market value of a trading book

Explanation

The Basel definition includes legal risk, such as fines, penalties or punitive damages from supervisory actions and private settlements. It excludes strategic and reputational risk. Market value declines fall under market risk.

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