OpRisk & IRM MCQs for CAIIB BFM (Unit 16) Module B

OpRisk & IRM MCQs for CAIIB BFM (Unit 16) Module B. Preparing for CAIIB BFM Unit 16 on Operational Risk and Integrated Risk Management (IRM)? Understand Operational Risk – the risk from failed processes, people, or systems – and IRM, the method for managing all risks together. This guide offers important MCQs covering Basel rules (BIA, TSA, AMA, SMA), risk frameworks, controls, and IRM concepts. Boost your exam readiness now!

OpRisk & IRM MCQs for CAIIB BFM (Unit 16) Module B – Attempt Now!

Question 1: According to the Basel Committee, what is the definition of Operational Risk?

A. Risk of financial loss due to market fluctuations.
B. Risk of loss from inadequate or failed internal processes, people, systems, or from external events.
C. Risk of loss due to credit defaults by borrowers.
D. Risk of loss from strategic business decisions.

Show Explanation

Correct Answer: B. Risk of loss from inadequate or failed internal processes, people, systems, or from external events. This is the exact definition provided by the Basel Committee.

Question 2: Operational risk can arise from which of the following?

A. Successful implementation of new technologies.
B. Deviations from normal function.
C. High profits and increased market share.
D. Efficient and well-trained employees.

Show Explanation

Correct Answer: B. Deviations from normal function. The syllabus states that operational risk arises from deviations from normal function.

Question 3: Human failures leading to operational risk can be due to which of these?

A. Proper training and adherence to procedures.
B. Omission or commission.
C. Regular system updates and maintenance.
D. Strong internal controls and oversight.

Show Explanation

Correct Answer: B. Omission or commission. Human failures causing operational risk include errors of omission or commission.

Question 4: What are some of the impacts of operational risk?

A. Increased revenue and lower expenses.
B. Increased expenses and loss of revenue opportunities.
C. Improved customer satisfaction and loyalty.
D. Enhanced employee morale and productivity.

Show Explanation

Correct Answer: B. Increased expenses and loss of revenue opportunities. Operational risk can lead to higher costs and missed chances to earn revenue.

Question 5: Which regulatory framework recognized operational risk as a critical aspect requiring specific capital allocation?

A. Basel I
B. Basel II
C. Basel III
D. Solvency II

Show Explanation

Correct Answer: B. Basel II. Basel II explicitly recognized the importance of operational risk and mandated capital allocation for it.

Question 6: Which of the following is NOT a driver for the increased importance of operational risk?

A. Deregulation
B. Globalization
C. Decreased competition
D. Rapid technological advancements

Show Explanation

Correct Answer: C. Decreased competition. Increased competition is listed as a driver for the growing importance of operational risk.

Question 7: In the modern banking environment, what is a characteristic related to the stability of systems?

A. Systems have more time to stabilize compared to traditional banking.
B. There is less time for systems to stabilize compared to traditional banking.
C. The time for systems to stabilize remains the same as in traditional banking.
D. System stability is not a concern in modern banking.

Show Explanation

Correct Answer: B. There is less time for systems to stabilize compared to traditional banking. The modern banking environment allows less time for systems to become stable.

Question 8: What is a benefit of effective operational risk management?

A. Increased risk capital.
B. Higher operational costs.
C. Reduced risk capital.
D. Decreased competitive edge.

Show Explanation

Correct Answer: C. Reduced risk capital. Effective operational risk management can lead to a reduction in the amount of capital needed to cover risks.

Question 9: Poor testing or training is related to which key modern risk factor?

A. Process changes
B. Human factors
C. Technology changes
D. External events

Show Explanation

Correct Answer: C. Technology changes. Poor testing and training are associated with the risk factor of technology changes.

Question 10: Inadequate assessment is a characteristic of which key modern risk factor?

A. Technology changes
B. Process changes
C. Human factors
D. External events

Show Explanation

Correct Answer: B. Process changes. Inadequate assessment is linked to the risk factor of process changes.

Question 11: Errors, fraud, and lack of training fall under which category of key modern risk factors?

A. Technology changes
B. Process changes
C. Human factors
D. External events

Show Explanation

Correct Answer: C. Human factors. Errors, fraud, and lack of training are examples of human factors contributing to operational risk.

Question 12: Disasters, cyberattacks, and changes in regulation are examples of which key modern risk factor?

A. Technology changes
B. Process changes
C. Human factors
D. External events

Show Explanation

Correct Answer: D. External events. Disasters, cyberattacks, and regulatory changes are classified as external events.

Question 13: Which of the following is a characteristic of operational risk?

A. It is limited to specific departments within an organization.
B. It exists in nearly all activities of an organization.
C. Its impact and frequency remain constant over time.
D. It is independent of changes within the organization.

Show Explanation

Correct Answer: B. It exists in nearly all activities of an organization. Operational risk is ubiquitous, meaning it’s present in almost all activities.

Question 14: How does the impact and frequency of operational risk typically behave?

A. They remain constant across different types of risks.
B. They vary depending on the specific type of operational risk.
C. High-frequency risks always have high impact.
D. Low-impact risks are always more frequent.

Show Explanation

Correct Answer: B. They vary depending on the specific type of operational risk. The impact and frequency of operational risk can differ significantly.

Question 15: According to the syllabus, which type of operational risk poses a greater threat?

A. High-frequency, low-impact risks.
B. Low-frequency, high-impact risks.
C. Risks with moderate frequency and impact.
D. Risks that are easily predictable.

Show Explanation

Correct Answer: B. Low-frequency, high-impact risks. These types of risks are considered a greater threat due to their potentially severe consequences.

Question 16: Which of the following is a Basel II event-based classification category for operational risk?

A. Market Risk
B. Credit Risk
C. Internal Fraud
D. Liquidity Risk

Show Explanation

Correct Answer: C. Internal Fraud. Internal Fraud is one of the categories in the Basel II event-based classification.

Question 17: Losses resulting from intentional acts within the organization, such as fraud, fall under which Basel II category?

A. External Fraud
B. Employment Practices and Workplace Safety
C. Internal Fraud
D. Clients, Products, and Business Practices

Show Explanation

Correct Answer: C. Internal Fraud. This category specifically covers losses from intentional internal actions.

Question 18: Losses resulting from intentional fraudulent activities by third parties are classified as:

A. Internal Fraud
B. External Fraud
C. Damage to Physical Assets
D. Business Disruption and System Failures

Show Explanation

Correct Answer: B. External Fraud. This category includes losses caused by intentional actions of external parties.

Question 19: Which Basel II category includes losses arising from violations of employment, health, or safety laws?

A. Clients, Products, and Business Practices
B. Damage to Physical Assets
C. Employment Practices and Workplace Safety
D. Execution, Delivery, and Process Management

Show Explanation

Correct Answer: C. Employment Practices and Workplace Safety. This category covers legal and agreement violations related to employment and safety.

Question 20: Losses due to negligence or failure to meet professional obligations to clients fall under which Basel II category?

A. Internal Fraud
B. External Fraud
C. Clients, Products, and Business Practices
D. Damage to Physical Assets

Show Explanation

Correct Answer: C. Clients, Products, and Business Practices. This category addresses losses from failures in serving clients appropriately.

Question 21: Damage to a company’s buildings due to a natural disaster would be classified under which Basel II category?

A. Business Disruption and System Failures
B. Execution, Delivery, and Process Management
C. Damage to Physical Assets
D. Internal Fraud

Show Explanation

Correct Answer: C. Damage to Physical Assets. This category includes losses from physical damage to assets.

Question 22: Losses from a major computer system outage that halts business operations would be categorized as:

A. Employment Practices and Workplace Safety
B. Business Disruption and System Failures
C. Execution, Delivery, and Process Management
D. External Fraud

Show Explanation

Correct Answer: B. Business Disruption and System Failures. This category covers losses from interruptions and system breakdowns.

Question 23: Which Basel II category includes losses from errors in processing transactions or managing vendors?

A. Internal Fraud
B. External Fraud
C. Employment Practices and Workplace Safety
D. Execution, Delivery, and Process Management

Show Explanation

Correct Answer: D. Execution, Delivery, and Process Management. This category deals with failures in transaction handling, process management, and vendor relationships.

Question 24: According to Basel 2011 Principles, who is primarily responsible for fostering a strong risk management culture within a bank?

A. External Auditors
B. Regulatory Authorities
C. Board and senior management
D. All employees

Show Explanation

Correct Answer: C. Board and senior management. (Rule/Principle 1) They are responsible for setting the tone and standards for risk management.

Question 25: An operational risk management framework should be integrated with which of the following?

A. Marketing strategy
B. Overall risk management
C. Human resources policy
D. Information technology infrastructure

Show Explanation

Correct Answer: B. Overall risk management. (Rule/Principle 2) The operational risk framework should be part of the broader risk management approach.

Question 26: Which of the following is a key role of the Board of Directors in operational risk management?

A. Day-to-day implementation of risk controls.
B. Establishing, approving, and reviewing the operational risk framework.
C. Conducting regular audits of operational processes.
D. Directly managing operational risk events.

Show Explanation

Correct Answer: B. Establishing, approving, and reviewing the operational risk framework. (Rule/Principle 3) This is a core responsibility of the board.

Question 27: What is another oversight responsibility of the Board of Directors regarding the operational risk framework?

A. Developing the specific policies and procedures.
B. Overseeing senior management’s implementation of the framework.
C. Directly reporting operational risk events to regulators.
D. Approving individual risk mitigation strategies.

Show Explanation

Correct Answer: B. Overseeing senior management’s implementation of the framework. (Rule/Principle 3) The board ensures senior management is putting the framework into practice.

Question 28: What must the Board of Directors approve and periodically review concerning operational risk?

A. Individual employee performance targets.
B. The bank’s risk appetite and tolerance statement for operational risk.
C. Specific operational risk incident reports.
D. The detailed budget for the operational risk department.

Show Explanation

Correct Answer: B. The bank’s risk appetite and tolerance statement for operational risk. (Rule/Principle 4) This defines the level of risk the bank is willing to accept.

Question 29: What is a key responsibility of senior management in the governance of operational risk?

A. Approving the operational risk framework.
B. Developing and implementing a clear governance structure with defined responsibilities.
C. Conducting independent reviews of the risk framework.
D. Reporting directly to regulatory bodies on operational risk matters.

Show Explanation

Correct Answer: B. Developing and implementing a clear governance structure with defined responsibilities. (Rule/Principle 5) Senior management sets up the organizational structure for managing operational risk.

Question 30: Senior management must ensure that policies, processes, and systems are aligned with what?

A. Industry best practices.
B. The approved risk appetite.
C. The operational risk management policy.
D. Regulatory guidelines.

Show Explanation

Correct Answer: B. The approved risk appetite. (Rule/Principle 5) All operational aspects should be consistent with the bank’s risk tolerance.

Question 31: What should be done with operational risk in all material products, activities, processes, and systems?

A. Ignore it if it is deemed insignificant.
B. Identify and assess it.
C. Transfer it to an external party immediately.
D. Assume it will be managed by existing controls.

Show Explanation

Correct Answer: B. Identify and assess it. (Rule/Principle 6) A crucial step is to recognize and evaluate potential operational risks.

Question 32: What is required before approving new products, activities, processes, or systems?

A. Immediate implementation to gain a competitive advantage.
B. Full operational risk assessment.
C. Approval from all departments, regardless of risk.
D. A cost-benefit analysis focusing solely on financial returns.

Show Explanation

Correct Answer: B. Full operational risk assessment. (Rule/Principle 7) New initiatives should be evaluated for potential operational risks beforehand.

Question 33: What should be done regularly with operational risk profiles and exposures?

A. Keep them confidential within the operational risk department.
B. Monitor them and report to relevant stakeholders.
C. Assume they remain constant unless a major event occurs.
D. Only review them during annual audits.

Show Explanation

Correct Answer: B. Monitor them and report to relevant stakeholders. (Rule/Principle 8) Continuous monitoring and reporting are essential for effective management.

Question 34: Maintaining a strong control environment involves using which of the following?

A. Solely relying on automated systems.
B. Policies, processes, systems, internal controls, and risk mitigation strategies.
C. Avoiding any form of risk-taking to ensure safety.
D. Focusing only on external threats and ignoring internal vulnerabilities.

Show Explanation

Correct Answer: B. Policies, processes, systems, internal controls, and risk mitigation strategies. (Rule/Principle 9) A combination of these elements creates a robust control environment.

Question 35: What type of plans should be implemented to ensure continued operation during disruptions?

A. Plans focused solely on financial recovery.
B. Business resiliency and continuity plans.
C. Plans that rely entirely on external support.
D. Minimal plans to reduce operational costs.

Show Explanation

Correct Answer: B. Business resiliency and continuity plans. (Rule/Principle 10) These plans help maintain operations during unexpected events.

Question 36: What kind of information should banks provide to the public regarding their operational risk management?

A. Detailed information about specific risk incidents.
B. Public disclosures regarding the bank’s operational risk management approach.
C. Confidential internal risk assessment reports.
D. Names and contact information of the operational risk management team.

Show Explanation

Correct Answer: B. Public disclosures regarding the bank’s operational risk management approach. (Rule/Principle 11) Transparency about risk management is important.

Question 37: What is a key characteristic of an Operational Risk Management Policy?

A. It is developed solely by the operational risk department.
B. It must be approved by the Board of Directors.
C. It does not need to define roles and responsibilities.
D. It is only relevant during times of crisis.

Show Explanation

Correct Answer: B. It must be approved by the Board of Directors. Board approval signifies the importance and authority of the policy.

Question 38: What action should senior management take when operational risk managers provide warnings?

A. Ignore the warnings if they conflict with business objectives.
B. Act upon the warnings provided.
C. Delegate the responsibility of addressing warnings to junior staff.
D. Only acknowledge the warnings without taking any specific action.

Show Explanation

Correct Answer: B. Act upon the warnings provided. Senior management should take appropriate steps based on the information provided by risk managers.

Question 39: Who holds the overall responsibility for the Operational Risk Management (ORM) framework within an organization?

A. Operational Risk Management Department (ORMD)
B. Operational Risk Management Committee (ORMC)
C. Board of Directors
D. Internal Audit Department

Show Explanation

Correct Answer: C. Board of Directors. (Role) The Board of Directors has the ultimate responsibility for the ORM framework.

Question 40: Which body is responsible for approving and reviewing the Operational Risk Management (ORM) framework?

A. Operational Risk Management Department (ORMD)
B. Operational Risk Management Committee (ORMC)
C. Board of Directors
D. Senior Management

Show Explanation

Correct Answer: C. Board of Directors. (Role) The Board has the authority to approve and periodically review the ORM framework.

Question 41: Ensuring a comprehensive internal audit of the Operational Risk Management (ORM) framework is the responsibility of which entity?

A. Operational Risk Management Department (ORMD)
B. Operational Risk Management Committee (ORMC)
C. Board of Directors
D. External Auditors

Show Explanation

Correct Answer: C. Board of Directors. (Role) The Board is tasked with ensuring the ORM framework is thoroughly audited internally.

Question 42: Identifying operational risks and formulating ORM policies and procedures are key responsibilities of which committee?

A. Audit Committee
B. Risk Management Committee (non-operational)
C. Operational Risk Management Committee (ORMC)
D. Executive Committee

Show Explanation

Correct Answer: C. Operational Risk Management Committee (ORMC). (Role) The ORMC is specifically responsible for these tasks.

Question 43: Setting guidelines for the assessment and measurement of operational risks is a function of which body?

A. Operational Risk Management Department (ORMD)
B. Operational Risk Management Committee (ORMC)
C. Board of Directors
D. Senior Management

Show Explanation

Correct Answer: B. Operational Risk Management Committee (ORMC). (Role) The ORMC establishes the standards for risk assessment and measurement.

Question 44: Ensuring that adequate controls are in place to mitigate operational risks is a responsibility of the:

A. Internal Audit Department
B. Operational Risk Management Department (ORMD)
C. Operational Risk Management Committee (ORMC)
D. Compliance Department

Show Explanation

Correct Answer: C. Operational Risk Management Committee (ORMC). (Role) The ORMC plays a role in ensuring sufficient controls are implemented.

Question 45: Which entity is responsible for implementing the Operational Risk Management (ORM) framework as approved by the Board?

A. Operational Risk Management Department (ORMD)
B. Operational Risk Management Committee (ORMC)
C. Board of Directors
D. Senior Management and the ORMC.

Show Explanation

Correct Answer: B. Operational Risk Management Committee (ORMC). (Role) The ORMC takes the lead in putting the Board-approved framework into action.

Question 46: Executing Operational Risk Management (ORM) procedures is a primary function of which department?

A. Compliance Department
B. Internal Audit Department
C. Operational Risk Management Department (ORMD)
D. Finance Department

Show Explanation

Correct Answer: C. Operational Risk Management Department (ORMD). (Role) The ORMD is responsible for carrying out the ORM procedures.

Question 47: Identifying and assessing inherent operational risks in products, activities, processes, and systems is a task performed by the:

A. Internal Auditors
B. External Consultants
C. Operational Risk Management Department (ORMD)
D. Business Line Managers

Show Explanation

Correct Answer: C. Operational Risk Management Department (ORMD). (Role) The ORMD is responsible for identifying and evaluating these inherent risks.

Question 48: Assessing the operational risk associated with new products and processes is a responsibility of the:

A. Marketing Department
B. Research and Development Department
C. Operational Risk Management Department (ORMD)
D. Legal Department

Show Explanation

Correct Answer: C. Operational Risk Management Department (ORMD). (Role) The ORMD plays a crucial role in evaluating risks in new initiatives.

Question 49: Monitoring operational risk profiles is a key activity of the:

A. Human Resources Department
B. Information Technology Department
C. Operational Risk Management Department (ORMD)
D. Finance Department

Show Explanation

Correct Answer: C. Operational Risk Management Department (ORMD). (Role) The ORMD is responsible for tracking and monitoring the risk profiles.

Question 50: To whom does the Operational Risk Management Department (ORMD) typically report?

A. External Auditors only
B. Board of Directors only
C. Senior management and the Board
D. Regulatory Authorities directly

Show Explanation

Correct Answer: C. Senior management and the Board. (Role) The ORMD provides reports on operational risk to both senior management and the Board.

Question 51: What is a requirement for the internal audit function when performing audits of the ORM framework?

A. It should report directly to the Operational Risk Management Committee.
B. It must be operationally independent.
C. It should be outsourced to ensure objectivity.
D. It must have prior approval from senior management for all audit activities.

Show Explanation

Correct Answer: B. It must be operationally independent. Independence is crucial for the integrity of the audit process.

Question 52: Which of the following is a component of an Operational Risk Management (ORM) framework?

A. Strategic planning documents
B. Employee performance reviews
C. Process mapping
D. Financial statements

Show Explanation

Correct Answer: C. Process mapping. (Process) Process mapping is listed as a key component of the ORM framework.

Question 53: Qualitative risk assessment in ORM can involve the use of:

A. Statistical modeling and simulations.
B. Scorecards and self-assessment.
C. Value at Risk (VaR) calculations.
D. Economic capital models.

Show Explanation

Correct Answer: B. Scorecards and self-assessment. (Process) These are examples of qualitative risk assessment techniques.

Question 54: What does ORM monitoring and control involve?

A. Primarily focusing on preventing all operational risk events.
B. An incident reporting framework for data collection.
C. Eliminating all potential operational risk exposures.
D. Guaranteeing zero financial loss from operational failures.

Show Explanation

Correct Answer: B. An incident reporting framework for data collection. (Monitor) This is a key aspect of monitoring and controlling operational risk.

Question 55: Regular monitoring of the operational risk profile is a part of:

A. Strategic planning
B. ORM monitoring and control
C. Internal capital adequacy assessment process
D. External audit procedures

Show Explanation

Correct Answer: B. ORM monitoring and control. (Monitor) This is a continuous activity within ORM.

Question 56: What is the purpose of collating incident data in ORM monitoring?

A. To assign blame for operational losses.
B. To determine the frequency and probability of future events.
C. To completely prevent similar incidents from occurring.
D. To reduce the workload of the operational risk department.

Show Explanation

Correct Answer: B. To determine the frequency and probability of future events. (Monitor) This data helps in understanding and predicting risks.

Question 57: Managing large operational risk exposures is a key aspect of:

A. Business continuity planning
B. Disaster recovery planning
C. ORM monitoring and control
D. Regulatory compliance

Show Explanation

Correct Answer: C. ORM monitoring and control. (Monitor) Identifying and managing significant risk exposures is crucial.

Question 58: What is required for the information system infrastructure to effectively support the ORM framework?

A. It should be independent of the bank’s overall IT strategy.
B. It needs to be responsive to the ORM framework needs.
C. It should primarily focus on financial reporting.
D. It does not need to integrate with other risk management systems.

Show Explanation

Correct Answer: B. It needs to be responsive to the ORM framework needs. (Monitor) The IT infrastructure should be aligned with the ORM requirements.

Question 59: Why is the measurement of operational risk losses considered challenging?

A. Because operational risk events are very predictable.
B. Because these losses typically follow a normal statistical distribution.
C. Because these losses typically do not follow a normal statistical distribution.
D. Because there is a lack of historical data on operational losses.

Show Explanation

Correct Answer: C. Because these losses typically do not follow a normal statistical distribution. This makes standard statistical estimation methods less reliable.

Question 60: Which of the following is a Basel II/III approach for operational risk capital allocation?

A. Market Risk Approach
B. Credit Risk Approach
C. Basic Indicator Approach (BIA)
D. Liquidity Risk Approach

Show Explanation

Correct Answer: C. Basic Indicator Approach (BIA). BIA is one of the recognized approaches.

Question 61: Under the Basic Indicator Approach (BIA), how is the capital for operational risk calculated?

A. A fixed percentage of total assets.
B. 15% of the average positive annual gross income over the previous three years.
C. Based on a risk-weighted asset calculation.
D. Using a complex internal model approved by the regulator.

Show Explanation

Correct Answer: B. 15% of the average positive annual gross income over the previous three years. (Formula) This is the formula for BIA capital calculation.

Question 62: According to the syllabus, what is excluded from the definition of Gross Income for BIA and TSA?

A. Interest income
B. Fee income
C. Provisions
D. Trading profits

Show Explanation

Correct Answer: C. Provisions. Provisions are specifically excluded from the definition of Gross Income for BIA and TSA.

Question 63: How is the capital under The Standardized Approach (TSA) calculated?

A. Using a single alpha factor applied to the total gross income.
B. By multiplying the gross income of each of the 8 defined business lines by a specific beta factor for that line and summing the results.
C. Based on the bank’s internal assessment of operational risk.
D. Using a fixed percentage determined by the regulator.

Show Explanation

Correct Answer: B. By multiplying the gross income of each of the 8 defined business lines by a specific beta factor for that line and summing the results. (Formula) This describes the calculation under TSA.

Question 64: What is required for a bank to migrate from the Basic Indicator Approach (BIA) to The Standardized Approach (TSA)?

A. No specific approval is needed as long as the bank meets the criteria for TSA.
B. Approval from the Reserve Bank of India (RBI).
C. Approval from the bank’s internal audit department.
D. Notification to the Basel Committee.

Show Explanation

Correct Answer: B. Approval from the Reserve Bank of India (RBI). RBI approval is necessary for this migration.

Question 65: Under which Basel approach is the capital charge for operational risk determined by the bank’s own internal measurement system?

A. Basic Indicator Approach (BIA)
B. The Standardized Approach (TSA)
C. Advanced Measurement Approach (AMA)
D. Supervisory Formula Approach

Show Explanation

Correct Answer: C. Advanced Measurement Approach (AMA). AMA allows banks to use their own internal models.

Question 66: What is a key requirement for a bank to use the Advanced Measurement Approach (AMA)?

A. It only needs to meet the minimum capital requirements.
B. It requires supervisory approval.
C. It does not need an independent risk management function.
D. Its risk management system can be informal and undocumented.

Show Explanation

Correct Answer: B. It requires supervisory approval. Regulatory approval is mandatory for using AMA.

Question 67: How does the Advanced Measurement Approach (AMA) generally compare to BIA and TSA in terms of risk sensitivity?

A. AMA is less risk-sensitive.
B. AMA is equally risk-sensitive.
C. AMA is more risk-sensitive.
D. Risk sensitivity is not a factor in these approaches.

Show Explanation

Correct Answer: C. AMA is more risk-sensitive. (Compare/Contrast) AMA is designed to be more tailored to a bank’s specific risk profile.

Question 68: Which of the following is an input for calculating capital under the Advanced Measurement Approach (AMA)?

A. Regulatory capital requirements for credit risk.
B. Internal loss data.
C. Market risk sensitivities.
D. Liquidity ratios.

Show Explanation

Correct Answer: B. Internal loss data. This is a crucial input for AMA capital calculation.

Question 69: What is the limit on risk mitigation through insurance for operational risk capital charge calculated under AMA?

A. No limit.
B. Capped at 10% of the total capital charge.
C. Capped at 20% of the total capital charge.
D. Capped at 50% of the total capital charge.

Show Explanation

Correct Answer: C. Capped at 20% of the total capital charge. Insurance mitigation has a specific limit under AMA.

Question 70: What is the initial minimum requirement for the amount of internal loss data a bank needs to use under AMA?

A. Three years
B. Five years
C. Seven years
D. Ten years

Show Explanation

Correct Answer: B. Five years. Banks initially need at least five years of internal loss data for AMA.

Question 71: What is the intended future requirement for the minimum amount of internal loss data under AMA?

A. Five years
B. Six years
C. Seven years
D. Eight years

Show Explanation

Correct Answer: C. Seven years. The requirement is intended to increase to seven years.

Question 72: In the generic risk estimation formula provided, what are the three key factors considered?

A. Probability of profit, potential revenue, and internal controls.
B. Estimated probability of occurrence, estimated potential financial impact, and estimated impact of internal controls.
C. Market volatility, credit default rates, and operational efficiency.
D. External economic conditions, internal management quality, and regulatory compliance.

Show Explanation

Correct Answer: B. Estimated probability of occurrence, estimated potential financial impact, and estimated impact of internal controls. (Formula) These are the three components of the generic risk estimation.

Question 73: Under which Basel approach is the mitigation of operational risk through insurance explicitly permitted?

A. Basic Indicator Approach (BIA)
B. The Standardized Approach (TSA)
C. Advanced Measurement Approach (AMA)
D. All of the above

Show Explanation

Correct Answer: C. Advanced Measurement Approach (AMA). Insurance mitigation for operational risk is only allowed under AMA.

Question 74: What is the maximum percentage of the operational risk capital charge that can be covered by insurance under AMA?

A. 10%
B. 15%
C. 20%
D. 25%

Show Explanation

Correct Answer: C. 20%. The benefit of insurance for capital calculation is capped at 20% under AMA.

Question 75: What is the Basel Committee currently considering as a potential replacement for the Advanced Measurement Approach (AMA)?

A. Basic Indicator Approach (BIA)
B. The Standardized Approach (TSA)
C. Standardized Measurement Approach (SMA)
D. Internal Models Approach (IMA)

Show Explanation

Correct Answer: C. Standardized Measurement Approach (SMA). SMA is being considered as a simpler alternative to AMA.

Question 76: Which of the following is a key input required for the implementation of the Advanced Measurement Approach (AMA)?

A. Market risk data
B. Credit risk ratings
C. Internal Loss Data
D. Liquidity ratios

Show Explanation

Correct Answer: C. Internal Loss Data. Internal Loss Data is one of the four key inputs for AMA.

Question 77: For AMA, how should quality internal loss data be typically structured?

A. Alphabetically by incident description.
B. Randomly, as incidents occur.
C. Often structured by event types and business lines (e.g., 7×8 matrix).
D. Chronologically by date of occurrence only.

Show Explanation

Correct Answer: C. Often structured by event types and business lines (e.g., 7×8 matrix). This structure facilitates analysis and reporting.

Question 78: What is the primary benefit of using external loss data in the AMA framework?

A. It is always more accurate than internal data.
B. It reduces the need for collecting internal loss data.
C. It is particularly useful for modeling low-frequency, high-severity events.
D. It is readily available and does not require scaling.

Show Explanation

Correct Answer: C. It is particularly useful for modeling low-frequency, high-severity events. External data helps when internal data for such events is limited.

Question 79: What is an example of a source for external loss data in India mentioned in the syllabus?

A. RBI database
B. SEBI records
C. CORDEx India
D. IRDAI reports

Show Explanation

Correct Answer: C. CORDEx India. (Example source) CORDEx India is provided as an example source for external loss data.

Question 80: What is the purpose of Scenario Analysis in the context of AMA?

A. To analyze historical trends in operational losses.
B. To evaluate exposure to high-severity, low-probability operational risk events.
C. To perform statistical modeling of frequent operational losses.
D. To conduct regular audits of internal controls.

Show Explanation

Correct Answer: B. To evaluate exposure to high-severity, low-probability operational risk events. (Process) Scenario analysis focuses on rare but potentially significant events.

Question 81: What does BEICF stand for in the context of AMA implementation?

A. Business Environment and Investment Control Factors
B. Business Economics and Internal Compliance Framework
C. Business Environment and Internal Control Factors
D. Banking Efficiency and International Credit Framework

Show Explanation

Correct Answer: C. Business Environment and Internal Control Factors. BEICF is a key component of AMA.

Question 82: What is the nature of the assessment conducted under Business Environment & Internal Control Factors (BEICF) in AMA?

A. It is solely based on historical loss data.
B. It is a backward-looking analysis of past control failures.
C. It is a forward-looking assessment considering business risk factors and the effectiveness of internal controls.
D. It is a one-time assessment conducted during AMA implementation.

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Correct Answer: C. It is a forward-looking assessment considering business risk factors and the effectiveness of internal controls. BEICF aims to anticipate future risks.

Question 83: Which of the following is a key tool included in the Business Environment & Internal Control Factors (BEICF) for AMA?

A. Value at Risk (VaR)
B. Stress Testing
C. Risk and Control Self-Assessment (RCSA)
D. Economic Capital Modeling

Show Explanation

Correct Answer: C. Risk and Control Self-Assessment (RCSA). RCSA is listed as a key tool within BEICF.

Question 84: What is Risk and Control Self-Assessment (RCSA)?

A. An assessment conducted by external auditors on the bank’s risk profile.
B. An internal process where units assess their operational risks and the effectiveness of their controls, identifying gaps.
C. A regulatory requirement imposed by the Basel Committee.
D. A statistical model used to predict future operational losses.

Show Explanation

Correct Answer: B. An internal process where units assess their operational risks and the effectiveness of their controls, identifying gaps. This is the definition of RCSA provided in the syllabus.

Question 85: What are Key Risk Indicators (KRIs)?

A. Financial ratios used to measure a bank’s profitability.
B. Metrics tracked over time that indicate changes in operational risk levels or potential future losses.
C. A set of rules and regulations for managing operational risk.
D. A list of all past operational loss events.

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Correct Answer: B. Metrics tracked over time that indicate changes in operational risk levels or potential future losses. This is the definition of KRIs.

Question 86: High staff turnover could be an example of which of the following?

A. A lagging financial indicator.
B. A Key Performance Indicator (KPI).
C. A Key Risk Indicator (KRI).
D. A leading market indicator.

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Correct Answer: C. A Key Risk Indicator (KRI). High staff turnover can signal potential operational risks.

Question 87: What does IRM stand for?

A. Independent Risk Management
B. Integrated Regulatory Management
C. Integrated Risk Management
D. Internal Resource Management

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Correct Answer: C. Integrated Risk Management. This is the full form of IRM.

Question 88: What is Integrated Risk Management (IRM)?

A. Managing each type of risk in isolation within different departments.
B. A coordinated approach to managing all types of risks across the entire organization.
C. Primarily focusing on financial risks such as credit and market risk.
D. Outsourcing all risk management activities to external consultants.

Show Explanation

Correct Answer: B. A coordinated approach to managing all types of risks across the entire organization. IRM takes a holistic view of risk.

Question 89: What does IRM consider regarding different types of risks?

A. It treats all risks as completely independent of each other.
B. It focuses only on the most significant individual risks.
C. It considers the interrelationships, correlations, and diversification effects between different risk types.
D. It standardizes the management of all risks using the same set of tools.

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Correct Answer: C. It considers the interrelationships, correlations, and diversification effects between different risk types. IRM acknowledges how different risks can influence each other.

Question 90: What is a key benefit of implementing Integrated Risk Management (IRM)?

A. Reduced need for specialized risk management expertise.
B. A simplified approach to managing individual risk types.
C. Provides a holistic view of risk, leading to better risk-adjusted performance measurement and more strategic capital allocation.
D. Lower regulatory scrutiny due to a unified risk management framework.

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Correct Answer: C. Provides a holistic view of risk, leading to better risk-adjusted performance measurement and more strategic capital allocation. IRM offers a comprehensive understanding of the overall risk landscape.

Question 91: Why is Integrated Risk Management (IRM) often considered essential for the survival of financial institutions?

A. It reduces the overall level of risk taken by the institution.
B. It guarantees profitability and prevents financial losses.
C. It integrates risk into business processes and centralizes risk oversight.
D. It eliminates the need for regulatory capital.

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Correct Answer: C. It integrates risk into business processes and centralizes risk oversight. This integration is crucial for long-term stability.

Question 92: Which of the following is a core advantage of IRM?

A. It decreases transparency in risk management.
B. It aligns risk strategy with operations.
C. It aims to reduce earnings to minimize risk.
D. It focuses solely on controlling upside potential.

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Correct Answer: B. It aligns risk strategy with operations. This alignment ensures that risk considerations are embedded in business activities.

Question 93: What is a challenge in implementing Integrated Risk Management (IRM)?

A. Easy availability of comprehensive and real-time risk data.
B. Strong willingness of all business units to share risk information.
C. Seamless integration of new risk management systems with existing legacy systems and data.
D. Overcoming cultural resistance and business unit silos.

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Correct Answer: D. Overcoming cultural resistance and business unit silos. This is a common hurdle in IRM implementation.

Question 94: Reluctance within business units to report losses or near misses can lead to what problem for IRM?

A. Overestimation of risk exposure.
B. Incomplete risk data.
C. Increased regulatory capital requirements.
D. Improved risk-adjusted performance measurement.

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Correct Answer: B. Incomplete risk data. Accurate data is essential for effective IRM.

Question 95: What is a practical outcome of effective Integrated Risk Management (IRM) in terms of capital?

A. It leads to a decrease in the total amount of capital held by the institution.
B. It enables improved capital allocation by relating capital reserves more accurately to quantified risk exposure.
C. It results in a standardized capital allocation across all business units, regardless of their risk profiles.
D. It eliminates the need for holding capital against operational risks.

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Correct Answer: B. It enables improved capital allocation by relating capital reserves more accurately to quantified risk exposure. IRM helps in optimizing capital usage.

Question 96: How does IRM facilitate better business performance assessment?

A. By focusing solely on revenue growth.
B. By using risk-adjusted measures.
C. By ignoring the impact of potential losses.
D. By comparing performance against competitors without considering risk.

Show Explanation

Correct Answer: B. By using risk-adjusted measures. IRM allows for a more accurate evaluation of performance by factoring in the risks taken.

Question 97: What is Risk-Adjusted Return on Capital (RAROC)?

A. A measure of operational efficiency.
B. A performance measure enabled by IRM, relating return to the economic capital required for the risk taken.
C. A regulatory metric for assessing capital adequacy.
D. A method for forecasting future earnings.

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Correct Answer: B. A performance measure enabled by IRM, relating return to the economic capital required for the risk taken. RAROC is a key performance indicator in IRM.

Question 98: What is Economic Value Added (EVA) in the context of IRM?

A. A measure of a company’s market capitalization.
B. An analysis facilitated by IRM, comparing risk-adjusted returns against the cost of capital.
C. A method for calculating regulatory capital requirements.
D. A tool for assessing employee performance.

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Correct Answer: B. An analysis facilitated by IRM, comparing risk-adjusted returns against the cost of capital. EVA helps in evaluating the true profitability after considering risk.

Question 99: How does IRM support more informed decisions on risk transfer?

A. By making risk transfer unnecessary through better internal controls.
B. By providing a framework for automatically transferring all identified risks.
C. By comparing the costs of risk transfer against the reduction in required economic capital.
D. By solely focusing on transferring the most frequent operational risks.

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Correct Answer: C. By comparing the costs of risk transfer against the reduction in required economic capital. IRM helps in making cost-effective decisions about risk transfer strategies.

Question 100: Which of the following is a key component of the Integrated Risk Management (IRM) approach?

A. Independent business unit operations
B. Centralized risk management integration
C. Decentralized risk decision-making
D. Minimal risk oversight at the top level

Show Explanation

Correct Answer: B. Centralized risk management integration. Strategy in IRM involves integrating risk management centrally.

Question 101: In the context of IRM approach, what does the ‘Organization’ component typically involve?

A. Eliminating all risk management roles to streamline operations.
B. Establishing a structure, which may include the role of a Chief Risk Officer (CRO).
C. Distributing risk management responsibilities across all employees without a dedicated function.
D. Outsourcing all risk management activities to external parties.

Show Explanation

Correct Answer: B. Establishing a structure, which may include the role of a Chief Risk Officer (CRO). Organization refers to the structural aspect of IRM.

Question 102: What is the focus of the ‘Process’ component in the IRM approach?

A. Allowing each business unit to handle risks in its own way.
B. Standardizing the way risks are handled across the organization.
C. Avoiding the documentation of risk management procedures to maintain flexibility.
D. Reacting to risks only after they have materialized.

Show Explanation

Correct Answer: B. Standardizing the way risks are handled across the organization. Process in IRM emphasizes consistency in risk management.

Question 103: What does the ‘Systems’ component of the IRM approach typically entail?

A. Relying solely on manual processes for risk management.
B. Using separate IT systems for different types of risks.
C. Integrated IT and analytical tools to support risk management.
D. Avoiding the use of technology to minimize costs.

Show Explanation

Correct Answer: C. Integrated IT and analytical tools to support risk management. Systems in IRM involve leveraging technology for effective risk management.

Question 104: What is the typical reporting line for a Chief Risk Officer (CRO)?

A. Reports to the Head of Human Resources.
B. Reports to the Chief Financial Officer (CFO).
C. Reports directly to the Managing Director (MD)/Chief Executive Officer (CEO) or BoarD.
D. Reports to the Head of Internal Audit.

Show Explanation

Correct Answer: C. Reports directly to the Managing Director (MD)/Chief Executive Officer (CEO) or Board. (Role) This reporting structure ensures the CRO has sufficient authority and independence.

Question 105: What principle should be followed regarding the credit risk management and credit sanctioning functions?

A. They should be combined under a single department for efficiency.
B. The credit risk management function should be separate from the credit sanctioning function.
C. The credit sanctioning function should oversee the credit risk management function.
D. There is no specific requirement for the separation of these functions.

Show Explanation

Correct Answer: B. The credit risk management function should be separate from the credit sanctioning function. This separation helps in maintaining objectivity and preventing conflicts of interest.

Question 106: How should IRM policies and procedures be developed?

A. Bottom-up, based on the needs of individual business units.
B. Top-down, consistent with strategic objectives and risk appetite.
C. Developed independently by each department without central coordination.
D. Based solely on regulatory requirements without considering the organization’s specific context.

Show Explanation

Correct Answer: B. Top-down, consistent with strategic objectives and risk appetite. This ensures alignment with the overall goals and risk tolerance of the organization.

Question 107: What is the purpose of using an integrated risk limit structure across the organization?

A. To allow each department to set its own risk limits independently.
B. To communicate risk appetite, control exposures, delegate authority, and adopt a common risk language via quantification.
C. To avoid quantifying risks and rely on qualitative assessments.
D. To restrict information sharing about risk exposures between different departments.

Show Explanation

Correct Answer: B. To communicate risk appetite, control exposures, delegate authority, and adopt a common risk language via quantification. Integrated limits promote consistency and understanding of risk across the organization.

Question 108: What is the goal of integrated risk reporting?

A. To provide detailed reports on each individual risk type separately.
B. To provide management with a holistic view of all risks across the entity, quantifying sources and estimating total exposure.
C. To only report on risks that exceed a certain thresholD.
D. To avoid quantifying risks and focus on narrative descriptions.

Show Explanation

Correct Answer: B. To provide management with a holistic view of all risks across the entity, quantifying sources and estimating total exposure. Integrated reporting offers a comprehensive understanding of the overall risk profile.

Question 109: What type of Information Technology (IT) architecture is required to effectively support the IRM framework?

A. A decentralized IT architecture where each department manages its own systems.
B. An integrated Information Technology (IT) architecture.
C. A basic IT infrastructure focused solely on transaction processing.
D. Minimal IT investment to reduce operational costs.

Show Explanation

Correct Answer: B. An integrated Information Technology (IT) architecture. Integration of IT systems is crucial for effective IRM.

Question 110: How does Basel III potentially incentivize effective Integrated Risk Management (IRM)?

A. By imposing higher capital requirements on banks with sophisticated IRM.
B. By potentially offering lower capital requirements for banks demonstrating sophisticated and compliant risk identification, measurement, and control systems.
C. By not considering the effectiveness of IRM in capital adequacy calculations.
D. By mandating a specific IRM framework for all banks.

Show Explanation

Correct Answer: B. By potentially offering lower capital requirements for banks demonstrating sophisticated and compliant risk identification, measurement, and control systems. (Cause/Effect) Basel III recognizes and rewards strong risk management practices.

Question 111: According to the summary, what is a key characteristic of operational risk?

A. It is static and does not change over time.
B. It is limited to specific high-risk industries.
C. It is ubiquitous (exists everywhere), variable (differing frequency/impact), and dynamic (changes with the organization).
D. It is easily predictable and quantifiable.

Show Explanation

Correct Answer: C. It is ubiquitous (exists everywhere), variable (differing frequency/impact), and dynamic (changes with the organization). This summarizes the nature of operational risk.

Question 112: Which of the following is a Basel event type for operational risk?

A. Market Risk
B. Credit Risk
C. Internal Fraud
D. Liquidity Risk

Show Explanation

Correct Answer: C. Internal Fraud. This is one of the defined Basel event types for operational risk.

Question 113: What is a requirement for Operational Risk Management (ORM) practices based on Basel guidelines?

A. The policy can be developed and approved by any department.
B. It requires a Board-approved policy.
C. Roles and responsibilities do not need to be clearly defineD.
D. Assessment and measurement methodologies are optional.

Show Explanation

Correct Answer: B. It requires a Board-approved policy. Board approval signifies the importance of ORM.

Question 114: What is the formula for capital calculation under the Basic Indicator Approach (BIA) for operational risk?

A. Capital = 10% * Total Assets
B. Capital = 20% * Average Annual Revenue
C. Capital = 15% * Avg. 3-year Gross Income
D. Capital = 12% * Previous Year’s Net Profit

Show Explanation

Correct Answer: C. Capital = 15% * Avg. 3-year Gross Income. This is the formula for BIA.

Question 115: How is capital calculated under The Standardized Approach (TSA) for operational risk?

A. A fixed percentage of the bank’s total gross income.
B. Based on a single beta factor applied to the total gross income.
C. Capital based on Gross Income * Beta Factors across 8 business lines.
D. Using the bank’s internal models with regulatory approval.

Show Explanation

Correct Answer: C. Capital based on Gross Income * Beta Factors across 8 business lines. This describes the TSA calculation.

Question 116: What is the basis for capital calculation under the Advanced Measurement Approach (AMA) for operational risk?

A. A standard formula prescribed by the regulator.
B. Based on a fixed percentage of risk-weighted assets.
C. Capital based on bank’s internal models (using internal/external data, scenarios, BEICF).
D. Primarily based on external credit ratings.

Show Explanation

Correct Answer: C. Capital based on bank’s internal models (using internal/external data, scenarios, BEICF). AMA allows banks to use their own models.

Question 117: Under what conditions is insurance mitigation allowed for operational risk capital calculation?

A. Under all Basel approaches without any limitations.
B. Only under BIA and TSA, with a cap of 10%.
C. Allowed only under AMA, limited to 20% of capital charge, and subject to specific criteria.
D. Allowed under all approaches, but requires prior regulatory approval for any amount.

Show Explanation

Correct Answer: C. Allowed only under AMA, limited to 20% of capital charge, and subject to specific criteria. Insurance mitigation has specific conditions under AMA.

Question 118: What has the Reserve Bank of India (RBI) done regarding the BIA and AMA approaches for Scheduled Commercial Banks in India?

A. Mandated the use of both BIA and AMA for all banks.
B. Retained BIA and AMA as the primary approaches for all banks.
C. Replaced BIA and AMA with the Standardized Measurement Approach (SMA) for certain banks from April 1, 2023.
D. Allowed banks to choose freely between BIA, TSA, and AMA.

Show Explanation

Correct Answer: C. Replaced BIA and AMA with the Standardized Measurement Approach (SMA) for certain banks from April 1, 2023. RBI has implemented SMA for larger banks.

Question 119: For which Scheduled Commercial Banks in India did the RBI replace BIA and AMA with SMA from April 1, 2023?

A. All Scheduled Commercial Banks.
B. Only foreign banks operating in India.
C. Scheduled Commercial Banks with a Business Indicator (BI) exceeding ₹8,000 crore.
D. Only newly established Scheduled Commercial Banks.

Show Explanation

Correct Answer: C. Scheduled Commercial Banks with a Business Indicator (BI) exceeding ₹8,000 crore. This specifies the criteria for SMA implementation by RBI.

Question 120: What are the core elements used in the calculation under the RBI’s Standardized Measurement Approach (SMA)?

A. Gross Income, Risk-Weighted Assets, and Capital Adequacy Ratio.
B. Business Indicator (BI), Business Indicator Component (BIC), and an Internal Loss Multiplier (ILM).
C. Net Interest Income, Non-Interest Income, and Operating Expenses.
D. Tier 1 Capital, Tier 2 Capital, and Total Risk Exposure.

Show Explanation

Correct Answer: B. Business Indicator (BI), Business Indicator Component (BIC), and an Internal Loss Multiplier (ILM). These are the key components of RBI’s SMA calculation.

Question 121: What is the minimum requirement for internal loss data under the RBI’s Standardized Measurement Approach (SMA)?

A. A minimum of 3 years of internal loss data.
B. A minimum of 5 years of internal loss data, including individual losses exceeding a threshold of ₹100,000.
C. A minimum of 7 years of internal loss data with no specific loss thresholD.
D. No specific requirement for internal loss data under SMA.

Show Explanation

Correct Answer: B. A minimum of 5 years of internal loss data, including individual losses exceeding a threshold of ₹100,000. This outlines the RBI’s requirement for loss data under SMA.

Question 122: According to the summary, what is the primary goal of Integrated Risk Management (IRM)?

A. To minimize all types of risks to zero.
B. To focus solely on regulatory compliance.
C. To achieve a holistic risk view, improve risk-adjusted performance, optimize capital use, enhance transparency, and align risk strategy with operations.
D. To allow each business unit to manage risks independently.

Show Explanation

Correct Answer: C. To achieve a holistic risk view, improve risk-adjusted performance, optimize capital use, enhance transparency, and align risk strategy with operations. This summarizes the key objectives of IRM.

Question 123: Which of the following is listed as a challenge in implementing IRM?

A. Abundance of readily available and integrated risk data.
B. Strong collaboration and information sharing between business units.
C. Seamless compatibility with all existing IT systems.
D. Real-time data integration.

Show Explanation

Correct Answer: D. Real-time data integration. This is a common hurdle in IRM implementation.

Question 124: Which of the following is a component of IRM implementation?

A. Maintaining separate risk management departments for each risk type.
B. Strategy, Organization (incl. CRO), Process, Systems.
C. Avoiding the use of technology to manage risks.
D. Focusing only on historical risk data without considering future risks.

Show Explanation

Correct Answer: B. Strategy, Organization (incl. CRO), Process, Systems. These are the key components of IRM implementation.

Question 125: Which of the following is an example of an IRM performance tool?

A. Gross Domestic Product (GDP)
B. Consumer Price Index (CPI)
C. Risk-Adjusted Return on Capital (RAROC)
D. Earnings Per Share (EPS)

Show Explanation

Correct Answer: C. Risk-Adjusted Return on Capital (RAROC). RAROC is a performance measure used in IRM.