Module: | MODULE B: RISK MANAGEMENT
Q410: Scenario: The Retail Banking division of a major commercial bank launches a new digital loan product. Within three months, the product suffers severe operational losses due to a flaw in the digital onboarding process. Based on operational risk governance principles, consider the following statements regarding the correct regulatory accountability:
1. The Retail Banking division, acting as the first line of defense, holds the primary accountability and risk ownership for the flawed digital onboarding process.
2. The Operational Risk Management Department (ORMD) is primarily accountable for the direct financial loss incurred by the new product.
3. The business units are expected to design and implement appropriate front-line controls to mitigate inherent risks before launching such products.
Which of the statements given above is/are correct?
2. The Operational Risk Management Department (ORMD) is primarily accountable for the direct financial loss incurred by the new product.
3. The business units are expected to design and implement appropriate front-line controls to mitigate inherent risks before launching such products.
Which of the statements given above is/are correct?
✅ Correct Answer: C
The correct answer is C. Statement 1 is correct: The Retail Banking division is the "business unit" generating revenue from the new product.
Under the Three Lines of Defense model, business units act as the first line of defense and bear the primary accountability, risk ownership, and responsibility for the operational losses stemming from processes they own.
Statement 2 is incorrect: The ORMD (Second Line) is independent and provides oversight, framework design, and monitoring.
It is strictly not accountable for the direct financial losses generated by a business unit's product failure.
Holding ORMD accountable would violate the principle of independent oversight.
Statement 3 is correct: A fundamental principle of risk ownership is that the business unit (First Line) must proactively design and implement adequate front-line internal controls to mitigate inherent operational risks before a product goes live to the market.
Therefore:
Option A is incorrect because Statement 2 is false.
Option B is incorrect because Statement 2 is false.
Option C is correct as both Statement 1 and 3 are true.
Option D is incorrect because Statement 2 is false.
Under the Three Lines of Defense model, business units act as the first line of defense and bear the primary accountability, risk ownership, and responsibility for the operational losses stemming from processes they own.
Statement 2 is incorrect: The ORMD (Second Line) is independent and provides oversight, framework design, and monitoring.
It is strictly not accountable for the direct financial losses generated by a business unit's product failure.
Holding ORMD accountable would violate the principle of independent oversight.
Statement 3 is correct: A fundamental principle of risk ownership is that the business unit (First Line) must proactively design and implement adequate front-line internal controls to mitigate inherent operational risks before a product goes live to the market.
Therefore:
Option A is incorrect because Statement 2 is false.
Option B is incorrect because Statement 2 is false.
Option C is correct as both Statement 1 and 3 are true.
Option D is incorrect because Statement 2 is false.