Module: | MODULE B: RISK MANAGEMENT
Q421: Scenario: A major software glitch in a bank's trading platform prevents the execution of several large sell orders. As a result, the bank is forced to hold depreciating assets overnight, leading to significant market losses and subsequent liquidity constraints. Based on the principles of Integrated Risk Management (IRM), consider the following statements:
1. This scenario demonstrates risk correlation, where an initial operational risk failure cascades directly into market risk and liquidity risk.
2. Managing risks in isolated "silos" is the most effective way to address these cascading failures.
3. An Integrated Risk Management approach is necessary to capture, quantify, and manage these interdependencies across different risk categories.
Which of the statements given above is/are correct?
2. Managing risks in isolated "silos" is the most effective way to address these cascading failures.
3. An Integrated Risk Management approach is necessary to capture, quantify, and manage these interdependencies across different risk categories.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is correct: This scenario perfectly illustrates risk correlation and the cascading nature of banking risks.
The root cause was an IT failure (Operational Risk), which structurally forced the bank to hold bad positions overnight, triggering a direct exposure to asset price volatility (Market Risk), and eventually leading to cash-flow pressure (Liquidity Risk). Statement 2 is incorrect: Managing risks in isolated "silos" (where the operational risk team doesn't talk to the market risk team) is exactly what causes banks to fail during cascading events.
Siloed risk management is considered an outdated, highly ineffective practice because it ignores interdependencies.
Statement 3 is correct: The primary necessity and justification for implementing an Enterprise/Integrated Risk Management (IRM) framework is to break down these silos.
IRM is specifically designed to capture, quantify, and manage the deep interdependencies and correlations across operational, credit, market, and liquidity risk categories.
Therefore:
Option A is incorrect because Statement 2 is false.
Option B is correct as both Statement 1 and 3 are true.
Option C is incorrect because Statement 2 is false.
Option D is incorrect because Statement 2 is false.
The root cause was an IT failure (Operational Risk), which structurally forced the bank to hold bad positions overnight, triggering a direct exposure to asset price volatility (Market Risk), and eventually leading to cash-flow pressure (Liquidity Risk). Statement 2 is incorrect: Managing risks in isolated "silos" (where the operational risk team doesn't talk to the market risk team) is exactly what causes banks to fail during cascading events.
Siloed risk management is considered an outdated, highly ineffective practice because it ignores interdependencies.
Statement 3 is correct: The primary necessity and justification for implementing an Enterprise/Integrated Risk Management (IRM) framework is to break down these silos.
IRM is specifically designed to capture, quantify, and manage the deep interdependencies and correlations across operational, credit, market, and liquidity risk categories.
Therefore:
Option A is incorrect because Statement 2 is false.
Option B is correct as both Statement 1 and 3 are true.
Option C is incorrect because Statement 2 is false.
Option D is incorrect because Statement 2 is false.