Module: | MODULE B: RISK MANAGEMENT
Q294: Consider the following statements regarding the Operational Risk framework and recent Basel III updates:
1. Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, systems, or from external events.
2. Legal risk is explicitly included within the regulatory definition of operational risk, requiring capital computation for potential litigation losses.
3. Under the finalized Basel III endgame norms, banks are encouraged to rely heavily on the Advanced Measurement Approach (AMA) using their own internal models.
Which of the statements given above is/are correct?
2. Legal risk is explicitly included within the regulatory definition of operational risk, requiring capital computation for potential litigation losses.
3. Under the finalized Basel III endgame norms, banks are encouraged to rely heavily on the Advanced Measurement Approach (AMA) using their own internal models.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: This is the exact, universal Basel definition of Operational Risk.
It encompasses internal fraud, human errors, IT system crashes, and external events like natural disasters or cyber-attacks.
Statement 2 is correct: Under Basel norms, Legal Risk (the risk of loss from regulatory fines, penalties, or lawsuits) is explicitly included in the definition of operational risk, and past legal losses directly impact the bank's operational capital charge.
Statement 3 is incorrect: A massive shift occurred in the Basel III "Endgame" finalization.
Regulators completely abolished the Advanced Measurement Approach (AMA) for operational risk because banks' internal models were found to be too inconsistent.
All banks must now use the single, unified Standardized Measurement Approach (SMA) to compute operational risk capital.
It encompasses internal fraud, human errors, IT system crashes, and external events like natural disasters or cyber-attacks.
Statement 2 is correct: Under Basel norms, Legal Risk (the risk of loss from regulatory fines, penalties, or lawsuits) is explicitly included in the definition of operational risk, and past legal losses directly impact the bank's operational capital charge.
Statement 3 is incorrect: A massive shift occurred in the Basel III "Endgame" finalization.
Regulators completely abolished the Advanced Measurement Approach (AMA) for operational risk because banks' internal models were found to be too inconsistent.
All banks must now use the single, unified Standardized Measurement Approach (SMA) to compute operational risk capital.