Chapter 3: Risk Definition and Taxonomy Flashcards
What is the definition of technology in the context of risk?
Not a risk itself, but a resource. Risks related to technology are potential incidents like system interruptions or application crashes.
What is manual processing considered in risk management?
A risk driver, not a risk. It increases the likelihood of errors, such as valuation or accounting mistakes.
How is compliance and regulatory change defined in risk management?
An obligation, not a risk. It introduces risks like compliance breaches due to complex regulations.
What does inadequate supervision/training lead to in risk management?
Control failures, not risks. They can lead to risks like internal fraud or customer dissatisfaction.
How should risks be defined?
Negative events, uncertainties, incidents, or accidents.
What question can help define risks clearly?
‘What could go wrong?’
What does risk management taxonomy refer to?
A classification scheme that organizes risks, causes, impacts, and controls into a MECE system.
What is the Basel definition of operational risk?
The risk of loss resulting from inadequate or failed internal processes, people, systems, or external events.
List the common impact categories in risk management.
- Financial Loss
- Reputation Damage
- Regulatory Non-compliance
- Customer Detriment
- Service Disruption
What are the categories of causes of operational risk according to Basel’s PPSE Framework?
- People
- Processes
- Systems
- External Events
What are the types of controls in risk management?
- Preventive Controls
- Detective Controls
- Corrective Controls
- Directive Controls
What do preventive controls aim to achieve?
Reduce the likelihood of risks by addressing potential causes before they materialize.
What is the purpose of detective controls?
Focus on identifying risks during or shortly after they occur.
What is the aim of corrective controls?
Mitigate the impacts of incidents by repairing damage or compensating for losses.
What do directive controls provide?
Guidelines and procedures to structure operations and reduce risks.
What is the structure of risk taxonomy anchored by?
The categories of impacts, causes, and controls.
What do Level 1 Basel categories represent?
The highest-level category, providing a broad classification of risks.
What is the characteristic of Level 2 Basel categories?
A more detailed version of Level 1, offering specific subcategories.
What is the role of Level 3 Basel categories?
Provides examples and illustrations, not officially recognized for regulatory purposes.
True or False: The Basel Committee recognizes three levels of regulatory categories.
False.
What has contributed to the evolving risk landscape since the late 1990s?
Technological advancements and mass digitization have increased cybercrime risks.
What new risks have emerged due to global business transformations?
Risks related to outsourcing, project management, and information management.
What highlighted the need for improved regulation after 2008?
The 2008 financial crisis.
What should firms consider when developing a risk taxonomy?
Current challenges and exposures, considering technological, regulatory, and operational changes.
