Chapter 9 MCQs

Question 1

1. Which regulatory body is primarily responsible for setting global banking regulation standards?
   A) Financial Action Task Force
   B) Basel Committee on Banking Supervision
   C) International Organization of Securities Commissions
   D) International Association of Insurance Supervisors

Answer 1

B

Question 2

2. What was a key focus of Basel II regarding operational risk? A) Eliminating operational risk entirely
   B) Focusing only on credit risk
   C) Addressing market risk only
   D) Requiring banks to set aside regulatory capital for operational risk

Answer 2

D

Question 3

3. Which approach is NOT one of the methods for calculating operational risk capital requirements under Basel II?
   A) Risk-adjusted Return on Capital
   B) Basic Indicator Approach
   C) Advanced Measurement Approach
   D) Standardised Approach

Answer 3

A

Question 4

4. FATF is primarily concerned with which aspect of operational risk?
   A) Credit risk management
   B) Market manipulation
   C) Financial crime
   D) IT system resilience

Answer 4

C

Question 5

5. Which Act, implemented in the USA, focuses on improving corporate governance and financial disclosure?
   A) Dodd-Frank Wall Street Reform
   B) Sarbanes-Oxley Act
   C) Gramm-Leach-Bliley Act
   D) Fair Credit Reporting Act

Answer 5

B

Question 6

6. Operational risk management is a part of which broader framework according to regulatory perspectives?
   A) Solely part of compliance
   B) Only part of internal audit functions
   C) Just a financial risk concern
   D) Overall corporate governance and risk management framework

Answer 6

D

Question 7

7. The Standardised Approach for operational risk capital calculation requires banks to:
   A) Segment their activities into predefined business lines and apply factors accordingly
   B) Use a fixed percentage of their annual revenue
   C) Implement a complex internal model
   D) Ignore operational risk capital calculation

Answer 7

A

Question 8

8. Solvency II is relevant to which sector?
   A) Banking
   B) Retail
   C) Insurance
   D) Securities

Answer 8

C

Question 9

9. Which of the following best describes the ‘Advanced Measurement Approach’ for operational risk?
   A) A simplified calculation method
   B) Requires pre-approval by the local regulator and is typically for larger banks
   C) Ignores the need for operational risk management
   D) Is universally applied across all banks regardless of size

Answer 9

B

Question 10

10. What is the main purpose of regulatory capital for operational risk?
    A) To ensure banks have enough capital to cover losses from operational risk events
    B) To eliminate operational risk
    C) To cover credit risk losses
    D) To invest in new technology

Answer 10

A

Question 11

11. Outsourcing risk is a concern for regulators because:
    A) It reduces the operational risk for banks
    B) Firms remain accountable for outsourced functions and associated risks
    C) It simplifies the operational risk framework
    D) Outsourcing is less expensive than maintaining in-house functions

Answer 11

B

Question 12

12. The Basel III framework streamlined the operational risk framework by:
    A) Replacing multiple approaches with a single standardised approach
    B) Introducing more complex calculations
    C) Removing the need for operational risk capital
    D) Focusing exclusively on credit risk

Answer 12

A

Question 13

13. The IOSCO focuses on which sector?
    A) Insurance
    B) Banking
    C) Health
    D) Securities

Answer 13

D

Question 14

14. Financial Action Task Force (FATF) recommendations focus on:
    A) Basel III implementation
    B) Insurance solvency margins
    C) Combating money laundering and terrorist financing
    D) Credit risk management techniques

Answer 14

C

Question 15

15. The Sarbanes-Oxley Act focuses on:
    A) Eliminating operational risk in banks
    B) Corporate governance and financial disclosure
    C) Defining operational risk for insurance companies
    D) Setting capital requirements for operational risk

Answer 15

B

Question 16

16. Which document by the Basel Committee focuses on operational risk management practices?
    A) ‘Sound Practices for the Management and Supervision of Operational Risk’
    B) ‘Principles for Effective Risk Data Aggregation’
    C) ‘Guidelines on Corporate Governance for Banks’
    D) ‘Basel III: A Global Framework for More Resilient Banks’

Answer 16

A

Question 17

17. Under Basel III, the AMA for operational risk will be:
    A) Expanded to include more banks
    B) The only method allowed
    C) Replaced with a single standardised approach
    D) Optional for small banks

Answer 17

C

Question 18

18. A key reason for the introduction of capital for operational risk was:
    A) Decrease in credit risk
    B) The stability of the IT systems
    C) Lack of outsourcing risks
    D) The emergence of IT and outsourcing risks

Answer 18

D

Question 19

19. The approach that requires banks to use a simple percentage of a specific business indicator to calculate operational risk capital is called:
    A) Advanced Measurement Approach
    B) Basic Indicator Approach
    C) Standardised Measurement Approach
    D) Basel III Approach

Answer 19

B

Question 20

20. The International Association of Insurance Supervisors (IAIS) provides:
    A) Guidance for the management of operational risk in the insurance industry
    B) Capital adequacy standards for banks
    C) IT risk management standards for financial institutions
    D) None of the above

Answer 20

A

Question 21

21. Operational risk capital under Pillar 2 is:
    A) Identical across all banks
    B) Not required
    C) Subject to individual national supervisor’s discretion
    D) Calculated using a fixed formula

Answer 21

C

Question 22

22. External disclosure of operational risks and management is required under:
    A) Pillar 1
    B) Advanced Measurement Approach
    C) Basic Indicator Approach
    D) Pillar 3

Answer 22

D

Question 23

23. The Financial Stability Board (FSB) oversees:
    A) The development of international financial sector policies
    B) The calculation of operational risk capital for banks
    C) The enforcement of the Sarbanes-Oxley Act
    D) The issuance of FATF recommendations

Answer 23

A

Question 24

24. Operational risk arising from legal and documentation issues was highlighted by:
    A) The introduction of Basel I
    B) Problems in the securitisation market after 2007
    C) The establishment of the FSB
    D) The Basic Indicator Approach

Answer 24

B

Question 25

25. Conduct risk has become a focus due to:
    A) Developments in the Basel Committee
    B) Changes in the insurance sector
    C) Scandals such as mis-selling and benchmark rigging
    D) The introduction of the Sarbanes-Oxley Act

Answer 25

C

Question 26

26. Business continuity management became a top concern for regulators after:
    A) The Basel II publication
    B) The introduction of AMA
    C) The development of outsourcing
    D) Events such as 9/11

Answer 26

D

Question 27

27. Regulators focus on IT systems risk because:
    A) It’s integral to operational risk and difficult to manage
    B) It’s covered extensively in the Sarbanes-Oxley Act
    C) It’s not considered a significant risk
    D) It’s easily managed by all banks

Answer 27

A

Question 28

28. In terms of compliance with operational risk regulations, regulators prefer:
    A) A litigious relationship with firms
    B) Firms to rely on external consultants for all operational risk matters
    C) A cooperative relationship with firms
    D) Firms to focus exclusively on credit risk

Answer 28

C

Question 29

29. Which aspect is NOT directly considered under the regulatory treatment of operational risk?
    A) Financial crime
    B) Customer satisfaction surveys
    C) Outsourcing risk
    D) Business continuity management

Answer 29

B

Question 30

30. The key global standard setter on financial crime is:
    A) The Basel Committee
    B) IOSCO
    C) IAIS
    D) Financial Action Task Force (FATF)

Answer 30

D