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FRM Part II · FRM Exam Part II · Risk Identification

Which statement best describes the definition of operational risk used in the Basel framework, which a firm's framework and taxonomy would typically build on?

Operational risk is the risk of loss from inadequate or failed internal processes, people and systems, or external events. It includes legal risk but excludes strategic and reputational risk. The alternatives describe market, credit and liquidity risk, which are separate risk types.

  1. AThe risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events, including legal risk but excluding strategic and reputational riskCorrect
  2. BThe risk of loss from changes in market prices, including interest rates and exchange rates
  3. CThe risk of loss from a counterparty failing to meet its obligations
  4. DThe risk that the bank cannot meet its cash obligations as they fall due

Explanation

The Basel definition covers failed processes, people, systems and external events and includes legal risk, but excludes strategic and reputational risk. The other options define market, credit and liquidity risk.

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