FRM Part II · FRM Exam Part II · Risk Identification
Which of the following is the best example of a risk that falls within the commonly used definition of operational risk, which covers losses from inadequate or failed internal processes, people and systems, or from external events?
The flood destroying a data center is operational risk because it is an external event causing a failure of systems and processes. Interest rate losses are market risk, borrower defaults are credit risk, and a reputation hit from weak earnings is a strategic risk.
- AA loss on a bond portfolio from a rise in interest rates
- BA loss when a borrower defaults on a loan
- CA loss due to a flood that destroys a data center and halts processingCorrect
- DA loss from a decline in the bank's reputation caused solely by a ratings downgrade due to weak earnings
Explanation
A flood damaging a data center is an external event disrupting systems, which is operational risk. The bond loss is market risk and the borrower default is credit risk. A reputation decline driven by weak earnings is strategic or business risk, not an operational failure.
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