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Answer: Acquire insurance against cyber risks and business interruptions from an insurance company.
## Explanation **Option C is the correct answer** because: - **Cyber risks and business interruptions** are operational risks that can be effectively transferred through insurance - Insurance transfers the financial impact of these risks to third-party insurers - This strategy directly reduces the bank's operational risk exposure - Insurance coverage for these risks is well-established in the market **Why other options are incorrect:** - **Option A**: Using a captive insurance subsidiary doesn't truly transfer risk - it remains within the corporate group structure - **Option B**: Insurance premiums cannot be deducted from Basel operational risk capital requirements; capital requirements are based on risk exposure, not premium payments - **Option D**: Outsourcing core operations like loan pricing and account review doesn't transfer credit risk and fraud risk - it may actually increase operational and reputational risks while the bank retains ultimate responsibility **Key Points:** - Risk transfer should involve genuine transfer of risk to third parties - Insurance is an effective mechanism for transferring operational risks like cyber risk and business interruption - Regulatory capital calculations consider genuine risk reduction, not just premium payments - Core banking functions should generally not be outsourced as they represent fundamental business operations
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An enterprise risk manager at a large bank is reviewing the results of a recently completed firm-wide risk control self-assessment (RCSA). The RCSA indicates that there are multiple classes of risk for which the bank should improve its risk controls, and the manager believes the firm should consider transferring some of these risks. The manager identifies the types of risks the bank should transfer, and also assesses the impact of different risk transfer strategies on the bank's risk profile and its regulatory capital calculation. Which of the following actions should the manager recommend for 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.