Regulatory Treatment of Operational Risk
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Questions and Answers

What is a key regulatory influence on operational risk management?

  • Market competition
  • International standard-setters (correct)
  • Customer satisfaction
  • Technological innovation

    • Which of the following describes the qualitative treatment of operational risk?

  • It includes evaluative criteria for assessing risk scenarios. (correct)
  • It disregards external influences on risk assessment.
  • It evaluates inherent risks without considering context.
  • It focuses solely on numerical modeling.

    • What aspect of regulatory interest is emphasized regarding operational risk?

  • Public perception of financial services
  • The profitability of financial institutions
  • Specific operational risk categories (correct)
  • Employee job satisfaction

    • Which committee is known for its work on operational risk capital regulation?

    <p>The Basel Committee (C)</p> Signup and view all the answers

    What is one of the key themes explored regarding regulators in operational risk?

    <p>Modeling of operational risk (A)</p> Signup and view all the answers

    What do regulators focus on when considering operational risk in financial firms?

    <p>Key operational risks (D)</p> Signup and view all the answers

    What implication does operational risk management have for capital adequacy?

    <p>It influences the amount of capital banks and insurers must hold. (C)</p> Signup and view all the answers

    Which is a characteristic of evolving approaches to regulation and supervision?

    <p>Increased flexibility to accommodate industry changes (C)</p> Signup and view all the answers

    What is the primary role of the Financial Stability Board (FSB)?

    <p>To promote global financial stability (C)</p> Signup and view all the answers

    Which of these organizations does the FSB oversee?

    <p>Basel Committee (D)</p> Signup and view all the answers

    How many core principles has the Basel Committee set for banking supervisors?

    <p>29 (D)</p> Signup and view all the answers

    Which core principle of the Basel Committee specifically addresses operational risk?

    <p>Core Principle 25 (C)</p> Signup and view all the answers

    What is a key aspect missing from IAIS's core principles compared to the Basel Committee?

    <p>Core principles specifically addressing operational risk (C)</p> Signup and view all the answers

    Which organization traditionally assesses adherence to the core principles established by national authorities?

    <p>International Monetary Fund (C)</p> Signup and view all the answers

    Which operational risk aspect is addressed by insurance core principle 7?

    <p>Corporate governance (B)</p> Signup and view all the answers

    Which of the following is NOT a function of the Financial Stability Board?

    <p>Conducting independent financial audits (C)</p> Signup and view all the answers

    What can be the consequences of failing to manage operational risk properly?

    <p>Damaging effects for firms and their stakeholders (C)</p> Signup and view all the answers

    Which authority is primarily involved in the global standardization of financial crime mitigation?

    <p>Financial Action Task Force (FATF) (D)</p> Signup and view all the answers

    In which year was the Financial Action Task Force (FATF) established?

    <p>1989 (D)</p> Signup and view all the answers

    How many member jurisdictions are currently part of the Financial Action Task Force (FATF)?

    <p>34 (D)</p> Signup and view all the answers

    What actions can regulatory bodies take against firms that fail in operational risk management?

    <p>Impose fines (C)</p> Signup and view all the answers

    What is one example of a consequence firms can face due to breaches of operational risk regulations?

    <p>Multibillion-dollar fines (C)</p> Signup and view all the answers

    What group is associated with the FATF focusing on regional efforts against money laundering?

    <p>Asia/Pacific Group (B)</p> Signup and view all the answers

    What should national authorities do regarding operational risk management?

    <p>Supervise compliance with regulations (D)</p> Signup and view all the answers

    Which category of operational risk loss events involves tax evasion and bribery?

    <p>Internal Fraud (C)</p> Signup and view all the answers

    What type of operational risk is classified as hacking damage and theft of information?

    <p>External Fraud (D)</p> Signup and view all the answers

    Which of the following is NOT a categorized operational risk loss event?

    <p>Failure to meet sales targets (C)</p> Signup and view all the answers

    What is an example of a risk under 'Damage to Physical Assets'?

    <p>Terrorism (C)</p> Signup and view all the answers

    Which category involves incidents such as market manipulation and fiduciary breaches?

    <p>Clients, Products, and Business Practice (A)</p> Signup and view all the answers

    What is an essential element of an operational risk framework for AMA banks?

    <p>Development of risk scenarios (B)</p> Signup and view all the answers

    What type of operational risk loss is associated with negligence like failed mandatory reporting?

    <p>Execution, Delivery, and Process Management (B)</p> Signup and view all the answers

    Which operational risk category addresses issues related to employee health and safety?

    <p>Employment Practices and Workplace Safety (C)</p> Signup and view all the answers

    What is a primary purpose of thematic on-site visits conducted by supervisors?

    <p>To indicate where industry-wide improvements are needed (A)</p> Signup and view all the answers

    Which operational risk area saw enhanced supervision after the events of 9/11?

    <p>Business continuity management (D)</p> Signup and view all the answers

    What is a challenge faced by supervisory bodies in relation to operational risk?

    <p>Insufficient resources to cover all aspects of operational risk (A)</p> Signup and view all the answers

    How do national authorities typically address operational risks?

    <p>By incorporating external consultants for specialized skills (D)</p> Signup and view all the answers

    Why might supervisors provide a high-level principles-based approach to guidance?

    <p>To allow flexibility in individual firm interpretations (C)</p> Signup and view all the answers

    Which scenario would likely require supervisors to focus on documentation risk?

    <p>A financial crisis similar to 2007-09 (D)</p> Signup and view all the answers

    Which method is NOT typically used by supervisors when addressing operational risk?

    <p>Conducting audits on every operational process (C)</p> Signup and view all the answers

    What influence did the 2007-09 crisis have on supervisory actions?

    <p>Rise in scrutiny of documentation risks (A)</p> Signup and view all the answers

    Study Notes

    Regulatory Treatment of Operational Risk

    • Regulation plays a critical role in the development and management of operational risk in financial institutions.
    • Key international regulatory bodies include the Basel Committee, IAIS (International Association of Insurance Supervisors), and IOSCO (International Organization of Securities Commissions).
    • The Financial Stability Board (FSB) coordinates and promotes global financial stability by overseeing the development of regulatory policies since its establishment in 1999.

    Core Principles and Standards

    • Basel Committee has established 29 core principles for banking supervision; core principle 25 specifically addresses operational risk assessment and reporting.
    • IAIS has set 26 core principles that influence insurance industry regulation; no specific principle addresses operational risk but relevant principles cover corporate governance and fraud.

    National Supervisory Approaches

    • National authorities align their supervisory approaches with international standards but may adapt them based on local requirements.
    • Supervisory bodies utilize their staff's expertise or hire external consultants for specialized areas like operational risk modeling or cyber-crime.
    • Supervisors adjust focus areas according to emerging risks, highlighted by increased scrutiny post-9/11 and the financial crisis of 2007-2009.

    Financial Crime Regulation

    • Regulatory bodies enforce compliance with global standards for mitigating financial crime, especially within banks.
    • The Financial Action Task Force (FATF) sets international standards against money laundering and has around 34 member jurisdictions since its inception by the G7 in 1989.

    Categories of Operational Risk

    • Risks are classified into several categories, including:
      • Internal Fraud: Misappropriation of assets, tax evasion, bribery.
      • External Fraud: Hacking, identity theft, forgery.
      • Employment Practices: Discrimination, workplace safety issues.
      • Client and Business Practice Risks: Market manipulation, fiduciary breaches.
      • Physical Asset Damage: Impacts from natural disasters and terrorism.
      • Business Disruption: Failures in utilities or software impacting operations.
      • Process Management Issues: Data entry errors and failed compliance reporting.

    Capital Adequacy and Operational Risk Frameworks

    • Advanced Measurement Approach (AMA) banks must establish a robust operational risk framework, integrating risk scenarios into daily operations and ensuring strong internal controls.
    • High-profile operational risk losses in internationally active banks highlight the importance of effective risk management, with notable cases of rogue trading and financial crime.

    Overall Impact of Operational Risk Management

    • Failure to manage operational risk can lead to significant direct and indirect consequences for firms, including financial penalties, reputational damage, and loss of investor trust.
    • Continuous supervision and an adaptive regulatory framework are essential in addressing evolving operational risk challenges in the financial industry.

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    Chapter 9 Operational Risk Management PDF

    Description

    Explore the key regulations and standards governing operational risk in financial institutions. This quiz covers international regulatory bodies, core principles established by the Basel Committee and IAIS, and national supervisory approaches. Test your understanding of the crucial guidelines that help maintain financial stability.

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