Learning objectives: Summarize the process of collecting and reporting internal operational loss data, including the selection of thresholds, the timeframe for recoveries, and reporting expected operational losses.
Questions:
601.1. Which of the following is TRUE about the selection of threshold for the purposes of reporting operational losses?
a. The primary driver of threshold selection is to include only tail risk events which drive OpRisk capital
b. Basel III prohibits the use of internal operational loss data thresholds, including in its proposed standardized measurement approach (SMA) for operational risk
c. The loss threshold can vary between banks and within a bank across event types, but the de minimis gross loss threshold must be low enough to capture all material exposures
d. The primary motivation for threshold selection is to avoid the costly data collection of losses that are small in severity (magnitude); for example, losses less than €20,000 probably should be excluded
601.2. It is currently the third fiscal quarter of fiscal year 2016 (Q3 2016) and Freshtech Bank has just discovered product defects that have triggered both a regulatory investigation and a dispute with a key counterparty. In an attempt to remedy the problem, management today announced a internal restructuring. The detailed, formal plan for restructuring will not be finalized until next year. As Chief Risk Officer, you have determined this even type should be classified under the Level 1 Category of Client, Project and Business Practices. You have asked your staff for an estimate of costs associated with this event. Which of the following is the MOST LIKELY candidate for current recognition (i.e., to be recognized in the current accounting period) of a provision for an EXPECTED operational loss due to this crisis?
a. Retraining and relocation costs associated with the restructuring triggered by the even
b. An "onerous contract" associated with the event: the unavoidable costs of meeting its obligations exceed the expected economic benefits
c. A projected estimate of an operating loss in the future (i.e., FY 2017 which is next year) due to the event and the estimate is given "with greater than 75% confidence"
d. There can be no current period recognition because IAS 37 does not allow for the provision of a future liability: any and all losses are recorded only after they become cash expenses
601.3. In regard to a recent loss event, your firm's accounting staff has itemized the following losses associated with the event:
a. $3,500,000
b. $4,250,000
c. $5,000,000
d. $6,487,500
Answers here:
Questions:
601.1. Which of the following is TRUE about the selection of threshold for the purposes of reporting operational losses?
a. The primary driver of threshold selection is to include only tail risk events which drive OpRisk capital
b. Basel III prohibits the use of internal operational loss data thresholds, including in its proposed standardized measurement approach (SMA) for operational risk
c. The loss threshold can vary between banks and within a bank across event types, but the de minimis gross loss threshold must be low enough to capture all material exposures
d. The primary motivation for threshold selection is to avoid the costly data collection of losses that are small in severity (magnitude); for example, losses less than €20,000 probably should be excluded
601.2. It is currently the third fiscal quarter of fiscal year 2016 (Q3 2016) and Freshtech Bank has just discovered product defects that have triggered both a regulatory investigation and a dispute with a key counterparty. In an attempt to remedy the problem, management today announced a internal restructuring. The detailed, formal plan for restructuring will not be finalized until next year. As Chief Risk Officer, you have determined this even type should be classified under the Level 1 Category of Client, Project and Business Practices. You have asked your staff for an estimate of costs associated with this event. Which of the following is the MOST LIKELY candidate for current recognition (i.e., to be recognized in the current accounting period) of a provision for an EXPECTED operational loss due to this crisis?
a. Retraining and relocation costs associated with the restructuring triggered by the even
b. An "onerous contract" associated with the event: the unavoidable costs of meeting its obligations exceed the expected economic benefits
c. A projected estimate of an operating loss in the future (i.e., FY 2017 which is next year) due to the event and the estimate is given "with greater than 75% confidence"
d. There can be no current period recognition because IAS 37 does not allow for the provision of a future liability: any and all losses are recorded only after they become cash expenses
601.3. In regard to a recent loss event, your firm's accounting staff has itemized the following losses associated with the event:
- Gross loss due to: $5,000,000
- Forgone revenue (opportunity cost): $3,000,000
- Estimated, non-rapid recovery with 50% probability: $1,500,000
- Insurance premiums (paid by the firm while the event occurred): $12,500
a. $3,500,000
b. $4,250,000
c. $5,000,000
d. $6,487,500
Answers here:
