Module: | MODULE B: RISK MANAGEMENT
Q277: Consider the following statements regarding the systematic process of risk identification and categorization in banks:
1. Risk identification is an ongoing process, which must continuously capture both on-balance sheet and off-balance sheet exposures at the transaction level.
2. Under the Basel framework, strategic risk and reputational risk are explicitly categorized as sub-components of operational risk for the purpose of capital allocation.
3. The categorization of a financial instrument into the banking book or the trading book, directly determines the type of regulatory capital charge applied to it.
Which of the statements given above is/are correct?
2. Under the Basel framework, strategic risk and reputational risk are explicitly categorized as sub-components of operational risk for the purpose of capital allocation.
3. The categorization of a financial instrument into the banking book or the trading book, directly determines the type of regulatory capital charge applied to it.
Which of the statements given above is/are correct?
✅ Correct Answer: C
The correct answer is C. Statement 1 is correct: Risk identification is dynamic and continuous; banks must identify risks at the granular transaction level for all exposures, whether they sit on the balance sheet (like term loans) or off the balance sheet (like bank guarantees). Statement 2 is incorrect: This is a highly tested concept.
Under the Basel framework, the definition of Operational Risk explicitly excludes Strategic Risk and Reputational Risk.
Therefore, capital is not directly allocated for them under the standardized operational risk charge.
Statement 3 is correct: Boundary classification is critical.
Instruments in the Banking Book attract a Credit Risk capital charge, whereas instruments held in the Trading Book attract a Market Risk capital charge.
Under the Basel framework, the definition of Operational Risk explicitly excludes Strategic Risk and Reputational Risk.
Therefore, capital is not directly allocated for them under the standardized operational risk charge.
Statement 3 is correct: Boundary classification is critical.
Instruments in the Banking Book attract a Credit Risk capital charge, whereas instruments held in the Trading Book attract a Market Risk capital charge.