The correct answer is D.

• Scenario I: This describes credit risk — the risk that counterparties in loan transactions will default, in this case due to natural disasters. Credit risk arises when a borrower is not able to repay a debt.
• Scenario II: This scenario refers to market risk — the possibility that the bank's assets and financial instruments will decline in value due to movement in key market variables like interest rates, exchange rates, or commodity prices.
• Scenario III: This is operational risk — the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Here it refers to losses from cyberattacks or significant system failures.

Things to Remember

• Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations. It is the risk that counterparties in loan/derivative transactions will default.