Chapter 1 Flash Cards

Question 1

What is operational risk?

Answer 1

The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events

Question 2

What are the four primary causal factors of operational risk?

Answer 2

Processes, people, systems, external events

Question 3

What are the two most common operational risk manifestations?

Answer 3

Business continuity risk and systems/IT risk

Question 4

Name four common operational risk impacts

Answer 4

Financial efficiency, service, reputation, lost business opportunities

Question 5

What links cause, event and impact?

Answer 5

The bow-tie model

Question 6

What goes between cause and event in the bow-tie model?

Answer 6

Preventative controls

Question 7

What goes between event and impact in the bow-tie model?

Answer 7

Corrective controls

Question 8

What are the four components of the operational risk management process?

Answer 8

Risk identification, risk assessment, risk response, risk monitoring/reporting

Question 9

What is the first line of defence in risk governance?

Answer 9

The business units

Question 10

What is the second line of defence in risk governance?

Answer 10

Central risk management functions

Question 11

What is the third line of defence in risk governance?

Answer 11

Internal audit

Question 12

What does RCSA stand for?

Answer 12

Risk and control self assessment

Question 13

What do risk indicators measure?

Answer 13

Exposure to key risks

Question 14

What do control indicators measure?

Answer 14

Effectiveness of key controls

Question 15

What are near misses in operational risk?

Answer 15

Events that could have caused loss but did not

Question 16

What is scenario analysis for?

Answer 16

Understanding severe but plausible risk exposures

Question 17

What are 3 key challenges with operational risk reporting?

Answer 17

Lack of integration between operational risk tools
Lack of common definitions and categorisation; Inappropriate tools

Question 18

What is internal fraud?

Answer 18

Misappropriation of assets by employees

Question 19

What is external fraud?

Answer 19

Theft of assets or information by external parties

Question 20

What is employment practices and workplace safety risk?

Answer 20

Discrimination, health and safety violations

Question 21

What is business disruption and systems failures risk?

Answer 21

Failures of technology infrastructure

Question 22

What is cyber risk?

Answer 22

Inability to protect digital assets from damage or theft

Question 23

What is compliance risk?

Answer 23

Failure to comply with laws and regulations

Question 24

What is legal and litigation risk?

Answer 24

Unexpected legal judgments or unenforceable contracts

Question 25

What is third party risk?

Answer 25

Losses due to vendors/partners not meeting expectations

Question 26

What are the 7 regulatory risk event types described in Basel II

Answer 26

1) Internal Fraud 2) External Fraud 3) Employment Practices and Workplace Safety 4) Clients, Products, and Business Practice 5) Damage to Physical Assets 6) Business Disruption and Systems Failures 7) Execution, Delivery, and Process Management

Question 27

What is Strategic Risk?

Answer 27

Uncertainties that may affect or may be created by an organisation’s business strategy and strategic objectives

Question 28

What is Credit Risk?

Answer 28

The risk of loss due to counterparty default. It is restricted to default or situations where the counterparty can but refuses to make payment when due

Question 29

What is Market Risk?

Answer 29

The risk of loss due to adverse economic changes in market conditions, rates or prices or fluctuations in volatility

Question 30

What is Liquidity Risk?

Answer 30

The risk of not having adequate funds available to meet financial commitments as they fall due. This may be caused by local or foreign economic conditions, a reduction in the firm’s credit rating, or situations where the firm is interested in trading an asset but cannot do so because nobody in the market wants to trade that asset

Question 31

What is Insurance Risk?

Answer 31

Also known as underwriting risk. Insurance risk is the risk of a claim being made on an insurance policy or underwriting

Question 32

What is the difference between inherent and unexpected operational risk?

Answer 32

Inherent/Expected risks occur frequently, Unexpected risks occur rarely

Question 33

What risk looks at market volatility?

Answer 33

Market Risk

Question 34

What risk looks at disaster, pandemic, cyber threats?

Answer 34

Operational Risk