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Answer: Acquire insurance against cyber risks and business interruptions from an insurance company.
The correct answer is C: Acquire insurance against cyber risks and business interruptions from an insurance company. This is because insurance is suitable for large banks to transfer operational risks that are predictable and well-understood, such as cyber risks and business discontinuity, which can have a significant impact on the bank's profit and loss profile. These risks are considered tail risks, which are large enough to warrant insurance coverage. Option A is incorrect because captive insurance or self-insurance is more appropriate for transferring smaller exposures below a certain threshold rather than tail risks. Option B is incorrect because insurance recoveries, not premiums, can be deducted from gross losses to calculate net losses, which influences the capital calculation and decreases required capital, but not on a one-to-one basis. Option D is incorrect because core credit-related activities are not typically outsourced by large traditional banks, and it is inappropriate for any bank to outsource its account review process. Outsourcing core operations such as loan pricing and review of new account applications would not effectively manage fraud risk, money laundering, and financial terrorism risk. Instead, non-core activities like IT server management, cloud computing, or call centers are typically outsourced.
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A corporate risk supervisor at a major financial institution is currently analyzing the outcomes from a recently completed company-wide Risk Control Self-Assessment (RCSA). The RCSA has identified several categories of risk that the bank needs to improve its risk mitigation strategies for, and the supervisor believes that the organization should consider delegating some of these risks. The supervisor identifies the specific categories of risks that should be delegated and assesses the impact of different risk delegation strategies on the bank's overall risk profile and the calculation of its regulatory capital. What course of action should the supervisor recommend the bank to take?
A
Use a captive insurance subsidiary to cover the bank's tail risk exposure.
B
Increase the bank's insurance coverage in order to benefit by deducting the cost of the premiums from the bank's required Basel operational risk capital.
C
Acquire insurance against cyber risks and business interruptions from an insurance company.
D
Transfer credit risk and fraud risk by outsourcing core operations such as loan pricing and review of new account applications.
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