Ch 7: Operational Risk

Question 1

The management of operational risk follows a sequence of logical steps:

a. monitoring, identification, assessment, control or mitigation
b. identification, assessment, monitoring, control or mitigation
c. identification, monitoring, assessment, control or mitigation
d. monitoring, assessment, identification, control or mitigation

Answer 1

b. identification, assessment, monitoring, control or mitigation

Question 2

Commercial banking is mainly exposed to what type of risk?

Answer 2

Credit risk

Question 3

Investment banking, trading, and treasury management is greatly exposed to this type of risk.

Answer 3

Market risk

Question 4

Business lines such as retail brokerage and asset management are exposed primarily to:

a. operational risk
b. market risk
c. credit risk
d. event risk

Answer 4

a. Operational risk

Question 5

Listed below are examples of operational risks EXCEPT

a. Model risk
b. Fraud risk
c. Event risk
d. Legal risk

Answer 5

c. Event risk

Question 6

(T or F) Because of the high complexity of products, trading banks have high model risk.

Answer 6

True

Question 7

(T or F) Legal risks are low for market banks and high for credit banks due to the more litigious environment of corporations relative to retail investors.

Answer 7

False. high, medium

Question 8

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

Answer 8

Operational risk

Question 9

The following are the different categories of operational risk EXCEPT

a. System risk
b. Credit risk
c. Process risk
d. People risk

Answer 9

b. Credit risk

Question 10

There are two approaches used to assess operational risk. Enumerate.

Answer 10

• Top-down model
• bottom-down model

Question 11

3Enumerate the tools used to manage operational risk

Answer 11

• audit oversight
  critical self-assessment
  key risk indicators
  earnings volatility
  causal networks
  actuarial models

Question 12

It estimates the objective distribution of losses from historical data and are widely used in the insurance industry.

Answer 12

Actuarial models

Question 13

The loss frequency distribution describes the number of loss events over a fixed interval of time. The loss severity distribution describes the size of the loss once it occurs.

a. loss severity distribution, loss frequency distribution
b. loss frequency distribution, loss severity distribution

Answer 13

b. loss frequency distribution, loss severity distribution

Question 14

Assuming that the frequency and severity of losses are independent, the two distributions can be combined into a distribution of aggregate loss through a process known as ___

a. Convolution
b. Tabulation

Answer 14

a. Convolution

Question 15

___ consists of systematically recording all possible combinations with their associated probabilities.

a. Convolution
b. Tabulation

Answer 15

b. Tabulation

Question 16

___ represents the size of operational losses that should be expected to occur. While ___ represents the deviation between the quantile loss at some confidence level and the expected loss.

Answer 16

• expected loss, unexpected loss

Question 17

It represents a loss in excess of the unexpected loss.

Answer 17

Stress loss

Question 18

Enumerate the internal control methods used to minimize operational risk

Answer 18

• separation of functions
  dual entries
  reconciliation
  tickler systems
  controls over amendments
  confirmations
  verification of prices
  authorization
  settlement
  internal/external audits

Question 19

39. These examinations provide useful information on potential weakness areas in the organizational structure or business process.

a. Authorization
b. Audits
c. Confirmations
d. Settlement

Answer 19

b. Audits

Question 20

Below are different types of financial risks EXCEPT

a. Operational risk
b. Credit risk
c. Event risk
d. Liquidity risk

Answer 20

c. Event risk