Module: | MODULE B: RISK MANAGEMENT
Q296: Consider the following statements regarding the specific exclusions within the Basel definition of Operational Risk:
1. Losses resulting from unauthorized trading activities, or internal fraud by bank employees, are strictly excluded from the operational risk capital charge.
2. Strategic risk, which arises from adverse business decisions or improper implementation of corporate goals, is not covered under the operational risk framework.
3. Reputational risk, involving the loss of public trust or brand value, does not attract a direct capital charge under the standardized operational risk guidelines.
Which of the statements given above is/are correct?
2. Strategic risk, which arises from adverse business decisions or improper implementation of corporate goals, is not covered under the operational risk framework.
3. Reputational risk, involving the loss of public trust or brand value, does not attract a direct capital charge under the standardized operational risk guidelines.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is incorrect: Internal fraud, rogue trading, and unauthorized activities by employees are classic, textbook examples of Operational Risk.
They absolutely attract a direct capital charge.
Statement 2 is correct: The Basel Committee explicitly excludes Strategic Risk (losses due to poor business plans, bad management decisions, or failed mergers) from the definition of operational risk, leaving it to be managed via internal governance rather than mandatory Pillar 1 capital.
Statement 3 is correct: Reputational Risk (damage to the bank's public image) is also explicitly excluded from the standardized operational risk framework because it is subjective and highly difficult to quantify for a standardized capital charge.
They absolutely attract a direct capital charge.
Statement 2 is correct: The Basel Committee explicitly excludes Strategic Risk (losses due to poor business plans, bad management decisions, or failed mergers) from the definition of operational risk, leaving it to be managed via internal governance rather than mandatory Pillar 1 capital.
Statement 3 is correct: Reputational Risk (damage to the bank's public image) is also explicitly excluded from the standardized operational risk framework because it is subjective and highly difficult to quantify for a standardized capital charge.