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Answer: The reported loss should include the legal costs paid to obtain construction permits to rebuild the destroyed branch buildings.
## Explanation According to operational risk reporting best practices and regulatory standards: - **Option A is incorrect**: Operational risk losses should be reported net of insurance recoveries, not gross. The settlement payment from the insurance company should be deducted from the gross loss amount. - **Option B is incorrect**: Opportunity costs (lost business) are generally not included in operational risk loss reporting as they are difficult to quantify reliably and are considered indirect losses. - **Option C is correct**: Legal costs directly incurred as a result of the operational risk event (such as obtaining construction permits to rebuild destroyed buildings) should be included in the reported loss amount. These are direct costs that can be reliably measured and attributed to the event. - **Option D is incorrect**: This is clearly an operational risk event (damage to physical assets from external events) rather than a market risk event. Market risk relates to changes in market prices, not physical destruction of assets. Best practices for operational risk loss reporting include: - Reporting net losses after insurance recoveries - Including direct, measurable costs associated with the event - Excluding indirect or opportunity costs - Properly classifying the event type according to operational risk categories
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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.