Chapter 13: Operational Risk (Sections 13.1 & 13.4)

Question 1

What is operational risk?

Answer 1

The risk of loss from failures in a bank’s internal processes, people, systems, or from external events—distinct from market or credit risk.

Question 2

What are the four main categories of operational risk?

Answer 2

1. Fraud & misconduct (e.g. rogue trading)
2. Systems failures (e.g. IT outages)
3. Legal & compliance (e.g. AML fines)
4. Physical & external (e.g. natural disasters, cyberattacks)

Question 3

Give a real-world example of fraud & misconduct risk.

Answer 3

In 2012, JPMorgan’s “London Whale” position lost over $6 billion when a trader hid massive bets in credit derivatives.

Question 4

What is scenario analysis for operational risk?

Answer 4

Management workshops extreme but plausible loss events (e.g. a large-scale cyber heist) to estimate how much capital the bank would need to absorb such a shock.

Question 5

How do banks use internal loss data to measure operational risk?

Answer 5

They maintain a database of past loss events—frauds, system outages, legal penalties—to model the frequency and severity of future losses.

Question 6

What is the Business‐line/Risk‐type matrix approach?

Answer 6

Classify historical losses by business line (e.g. retail, trading) and by risk type (e.g. people, systems) to identify where the bank is most vulnerable.

Question 7

What does the Basel II Advanced Measurement Approach (AMA) require?

Answer 7

With supervisory approval, banks combine internal data, external loss data, scenario analysis, and business environment factors to set an operational-risk capital charge.