Fundamentals of Risk Management (2)

Question 1

Credit Risk

Answer 1

Risk that a party to a transaction cannot provide the necessary funds as contracted for settlement to take place on the scheduled date.

Question 2

Operational Risk

Answer 2

Risk that a transaction is altered or delayed due to an unintentional error.

Question 3

Fraud Risk

Answer 3

Risk that a payment transaction will be initiated or altered in an attempt to misdirect or misappropriate funds.

Question 4

Systemic Risk

Answer 4

Risk that the inability or unwillingness of one funds transfer system participant to settle its commitments will cause other participants to be unable to settle their commitments.

Question 5

Compliance Risk

Answer 5

Risk that occurs when a party to a transaction fails to comply, either knowingly or inadvertently, with payment system rules and policies, regulations and applicable U.S. and state law.

Question 6

Direct Access Risk

Answer 6

Risk that occurs when an ODFI permits an Originator or Third-Party to use its routing number to send files directly to the ACH Operator.

Question 7

Reputation Risk

Answer 7

Risk that occurs when a negative publicity regarding a financial institution’s business practices leads to a revenue loss or litigation.

Question 8

Third-Party Risk

Answer 8

Risk that arises from a financial institution relying upon outside parties to perform services or activities on its behalf.

Question 9

Legal Risk

Answer 9

Risk that occurs from an institution’s failure to enact appropriate policies, procedures or controls to ensure it conforms to laws, regulations, contractual arrangements and other legally binding agreements and requirements.

Question 10

Transaction Risk

Answer 10

Risk associated with foreign exchange.

Question 11

Liquidity Risk

Answer 11

Current and potential risk to earnings or capital arising from a financial institution’s inability to settle an obligation for full value when it is due.

Question 12

Strategic Risk

Answer 12

Risk might arise from making poor business decisions, from the substandard execution of decisions, from inadequate resource allocation or from failure to respond well to changes in the business environment.

Question 13

Cross-Channel Risk

Answer 13

Risk that occurs because of theft from deposit accounts by way of multiple access points.

Question 14

Counterparty Risk

Answer 14

Risk to each party of a contract that the counterparty will not live up to its contractual obligations.

Question 15

Enterprise Risk Management (ERM)

Answer 15

Process of planning, organizing, leading and controlling the activities of an organization to minimize the effects of risk on that organization.

Question 16

Committee of Sponsoring Organizations (COSO)

Answer 16

Voluntary private-sector organization formed in 1985 dedicated to improving the quality of financial reporting.

Question 17

Federal Reserve Board’s Payments System Risk (PSR) Policy

Answer 17

Governs the provisions of intraday credit (daylight overdrafts) in accounts at the Reserve Banks.

Question 18

(1) Missed transmission deadlines; (2) Hardware/software failures and loss of power; (3) Clerical errors; (4) Inadequate procedures; (5) Inadequate training

Answer 18

Examples of operational risk with ACH payments.

Question 19

(1) Processing risks; (2) Employee and/or service provider errors; (3) Hardware and software failure, including service provider

Answer 19

Examples of operational risk with card payments.

Question 20

(1) Faulty equipment; (2) Inadequate procedures; (3) Inadequate training; (4) Poor image quality; (5) Resubmission of file or redeposit of physical items; (6) Technology-related issues, such as failure to maintain compatible and integrated IT systems; (7) Reliability of RDC vendor

Answer 20

Examples of operational risk with check payments processed through Remote Deposit Capture (RDC).

Question 21

(1) System failure caused by breakdown in hardware/software; (2) System disruption; (3) System compromise; (4) Inadequate procedures; (5) Inadequate training

Answer 21

Examples of operational risk with wire payments.

Question 22

(1) Inadequate procedures; (2) Inadequate training; (3) Reliability of vendor; (4) Employee or end user errors

Answer 22

Examples of operational risk with emerging payments.

Question 23

(1) Misappropriation of funds; (2) Misdirect payment; (3) Account takeover; (4) Business email compromise scam; (5) Vendor impersonation fraud

Answer 23

Examples of fraud risk with ACH payments.

Question 24

(1) Lost or stolen cards; (2) Phishing scams; (3) Skimmers; (4) Data breaches; (5) Counterfeit or altered cards; (6) Unauthorized use of a Cardholder’s card number for card-not-present transactions

Answer 24

Examples of fraud risk with card payments.

Question 25

(1) Lost or stolen checks; (2) Alteration of deposited items; (3) Forged or missing endorsement; (4) Deposit of counterfeit items; (5) Check kiting; (6) Redeposit of items/duplicate presentment through RDC; (7) Proper disposal of deposited items by RDC customers; (8) Insider fraud

Answer 25

Examples of fraud risk with check payments.

Question 26

(1) Malware, spyware and viruses; (2) Business email compromise; (3) Money laundering; (4) Dishonest employees; (5) Lack of dual controls or segregation of duties

Answer 26

Examples of fraud risk with wire payments.

Question 27

(1) Speed of processing; (2) Reduced reaction time to fraud; (3) Breaches/data security; (4) Malware, spyware and viruses

Answer 27

Examples of fraud risk with emerging payments.

Question 28

(1) Originator fails to fund ODFI for credit entries initiated; (2) RDFI posted credit entry prior to Settlement Date

Answer 28

Examples of credit risk with ACH credit payments.

Question 29

(1) ODFI is unable to recover funds from Originator for returned debit entries; (2) RDFI is untimely in returning debit entries

Answer 29

Examples of credit risk with ACH debit payments.

Question 30

Up to two banking days

Answer 30

Maximum timeframe an ODFI is exposed to credit risk for ACH credit origination.

Question 31

(1) Up to 60 days from the Settlement Date for consumer Standard Entry Class (SEC) codes per the ACH Rules; (2) Up to 60 days from the consumer's statement date per Regulation E

Answer 31

Maximum timeframe an ODFI is exposed to credit risk for ACH debit origination.

Question 32

(1) Merchant declares bankruptcy, commits fraud or is otherwise unable to pay its chargebacks causing the Acquiring Financial Institution to pay the Card Issuer; (2) With EMV, the Card Issuer may encounter credit risk due to fallback transactions

Answer 32

Examples of credit risk with card payments.

Question 33

(1) Bank of First Deposit (BOFD) credits the account holder provisionally and settlement does not occur for several days; (2) Paying Bank misses deadline for processing returns and adjustments

Answer 33

Examples of credit risk with check payments.

Question 34

(1) Failure or bankruptcy of entity initiating payment; (2) Funds availability prior to receiving final settlement; (3) Per-transaction dollar limits being set too high; (4) Funds unavailable to satisfy debit return

Answer 34

Examples of credit risk with emerging payments.

Question 35

(1) Originating/Sender Bank makes an irrevocable payment on behalf of a customer through an extension of credit; (2) Beneficiary Bank does not post the payment properly

Answer 35

Examples of credit risk with wire payments.

Question 36

(1) Regulation E; (2) Regulation Z; (3) Card Association Rules

Answer 36

Card payment system is governed by these rules and regulations.

Question 37

(1) UCC 4A; (2) OFAC; (3) Bank Secrecy Act (BSA); (4) Regulation E, Subpart B; (5) Regulation J; (6) Regulation CC; (7) Federal Reserve Operating Circulars 1, 5 & 6

Answer 37

Wire payment system is governed by these rules and regulations.

Question 38

(1) Regulation CC; (2) UCC Article 3; (3) UCC Article 4; (4) Regulation J, Subpart A; (5) Federal Reserve Bank Operating Circular 3; (6) ECCHO Rules

Answer 38

Check payment system is governed by these rules and regulations.

Question 39

(1) ACH Rules; (2) EFTA and Regulation E; (3) Regulation CC; (4) Regulation D; (5) 31 CFR Part 203, 208, 210 & 370; (6) UCC Articles 4 & 4A; (7) BSA/AML; (8) State EFT Acts; (9) FRB Operating Circular 4; (10) Private Sector ACH Operator Rules; (11) OFAC

Answer 39

ACH Network is governed by these rules and regulations.

Question 40

Generally, these are ACH or card transactions; therefore, the respective payment system rules and regulations would apply.

Answer 40

Emerging payments are governed by these rules and regulations.