Module: | MODULE B: RISK MANAGEMENT
Q259: According to the basic risk manaagement framework, consider the following statements regarding the primary classification of financial risks:
1. Credit risk arises primarily from the failure of a borrower or counterparty to meet its agreed financial obligations on the due date.
2. Market risk is triggered predominantly by internal systemic failures, human errors, and inadequate operational processes within the bank.
3. Operational risk strictly encompasses the financial losses resulting from adverse movements in interest rates, foreign exchange rates, and equity prices.
Which of the statements given above is/are correct?
2. Market risk is triggered predominantly by internal systemic failures, human errors, and inadequate operational processes within the bank.
3. Operational risk strictly encompasses the financial losses resulting from adverse movements in interest rates, foreign exchange rates, and equity prices.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: Credit Risk is the oldest and most fundamental banking risk.
It is defined as the potential that a bank borrower or counterparty will fail to meet its contractual financial obligations in accordance with agreed terms (e.g., defaulting on a loan).
Statement 2 is incorrect: It describes Operational Risk, not Market Risk.
Operational Risk is defined by the Basel Committee as the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events (including fraud and legal risk). Statement 3 is incorrect: It describes Market Risk, not Operational Risk.
Market risk is the risk of losses in on- and off-balance-sheet positions arising from adverse movements in market prices, specifically interest rates, foreign exchange rates, equity prices, and commodity prices.
It is defined as the potential that a bank borrower or counterparty will fail to meet its contractual financial obligations in accordance with agreed terms (e.g., defaulting on a loan).
Statement 2 is incorrect: It describes Operational Risk, not Market Risk.
Operational Risk is defined by the Basel Committee as the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events (including fraud and legal risk). Statement 3 is incorrect: It describes Market Risk, not Operational Risk.
Market risk is the risk of losses in on- and off-balance-sheet positions arising from adverse movements in market prices, specifically interest rates, foreign exchange rates, equity prices, and commodity prices.