hard · 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 already capitalizes reputational risk via the BIC services component.
- Deposit runoff is a Market Risk factor and is therefore handled through VaR mapping rather than impact tolerances.
- Legal risk is excluded from the definition of operational risk under the current Basel regime.
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