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Answer: The reported loss should include the legal costs paid to obtain construction permits to rebuild the destroyed branch buildings.
**Correct Answer: C** **Explanation:** C is correct. Regulators generally only require the recording of losses directly identifiable as negative financial effects of operational incidents. Known legal costs incurred as a result of the loss are an example of direct financial losses and should be included as part of the report. **Why other options are incorrect:** - **A is incorrect:** The payment from the insurance company is considered a recovery and should be included in the report. Operational risk reporting should reflect net losses after recoveries. - **B is incorrect:** Only direct costs are required to be reported to the regulator. The foregone revenues due to the destroyed buildings cannot be directly quantified as a cost incurred by the bank and therefore are not required to be included in the report. Generally, estimates of foregone revenues due to operational loss events do not qualify to be included in loss reports because they are not direct costs or estimates such as a loss provision for expected costs in the future. - **D is incorrect:** Damage due to natural disasters is an operational risk, classified under the Damage to Physical Assets category, and should not be classified as market risk. Also, even in cases where operational risk is more directly related to market risk (such as an unintentional error in booking a position that results in a market risk loss), the "boundary event" between operational risk and market risk should be classified as an operational risk. **Learning Objective:** Explain best practices for the collection of operational loss data and reporting of operational loss incidents, including regulatory expectations.
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A bank owned five retail branch buildings that were destroyed in a hurricane. Several months later, the bank received a settlement payment from its insurance company that covered a portion of the value of the buildings. A risk manager is preparing an operational risk incident report of this loss for the national regulator and wants to ensure that all the appropriate costs are included in the report and that the reporting process meets best industry practices. Which of the following statements correctly describes how the losses from this event should be reported?
A
The report should include the gross loss incurred as a result of the event, but not the settlement payment received from the insurance company.
B
The reported loss should include an estimate of the opportunity costs of banking business lost at the affected branches.
C
The reported loss should include the legal costs paid to obtain construction permits to rebuild the destroyed branch buildings.
D
The losses should be reported as a market risk event rather than an operational risk event because they resulted in a reduction of the value of the bank's real estate portfolio.