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

Which of the following losses at a bank is best classified as operational risk rather than credit or market risk?

Employee fraud through bypassed authorisation controls is operational risk, because it results from failed internal processes and people. Borrower default is credit risk, and bond price declines or currency losses on open positions are market risk.

  1. AA corporate borrower defaults on a term loan because its business collapses
  2. BA bank's bond portfolio loses value as yields rise
  3. CFraudulent transfers made by an employee who bypassed internal authorisation controlsCorrect
  4. DThe rupee depreciates, reducing the value of the bank's open dollar position

Explanation

Operational risk is loss from inadequate or failed internal processes, people, systems or external events. Employee fraud through weak controls fits this. Borrower default is credit risk, while bond price fall and currency loss are market risk.

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