medium · FRM Part 2 Operational Risk
A bank's 'Business Impact Analysis' (BIA) identifies that a failure in its 'Client Onboarding' service results in legal fines of $100k per day after the first 48 hours, and reputational damage that could cause a 5% deposit runoff after 5 days.
If an impact tolerance is set based on 'systemic stability,' why might these financial/reputational costs be secondary to the tolerance limit?
- Impact tolerances focus on the point where disruption causes intolerable harm to customers or the system, which may occur before or after significant financial loss to the firm.
- The SMA framework's Business Indicator Component already assumes reputational risk exposure is fully capitalized, making a separate tolerance limit largely redundant.
- Deposit runoff is treated purely as a Market Risk factor in this framework, so it would instead be handled entirely through standard VaR mapping techniques rather than tolerances.
- Legal risk, including regulatory fines arising from enforcement actions such as these, is explicitly excluded from the definition of operational risk under the current Basel capital regime.
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