I85PREP
⌘ K
CrTAS study materials
CrTAS study resources

CrTAS: Operational, Compliance, and Model Risk

CrTAS · Work through your exam, one topic at a time.

All guide sections

Operational, Compliance, and Model Risk

Operational, Compliance, and Model Risk

This domain tests the operational risk capital framework, loss-event classification, and model risk management expectations. Expect one Standardised Measurement Approach calculation and one question separating validation from development.

Operational risk

Definition: loss from inadequate or failed internal processes, people, systems or external events; includes legal risk, excludes strategic and reputational risk. Seven Basel event types: internal fraud; external fraud; employment practices and workplace safety; clients, products and business practices; damage to physical assets; business disruption and system failure; execution, delivery and process management. Basel III SMA: capital = BIC x ILM, where BIC applies marginal coefficients of 12%, 15% and 18% to business indicator slices, and ILM = ln(e - 1 + LC/BIC), applied to banks above bucket 1.

Model risk

Model risk is loss from decisions based on incorrect or misused models. Under supervisory guidance such as SR 11-7 the components are sound development, rigorous validation (conceptual soundness, outcomes analysis, benchmarking) and governance: inventory, tiering, ownership, ongoing monitoring, and a validation function independent of the developers.

Compliance

AML and KYC, sanctions and PEP screening, conduct risk, and the control environment around them. A screening failure is a compliance and operational event, not a credit event.

Worked example

BI = EUR 2bn and LC = EUR 200m. BIC = 12% x EUR 1bn + 15% x EUR 1bn = EUR 120m + EUR 150m = EUR 270m. ILM = ln(1.71828 + 200/270) = ln(2.4590) = 0.900. Capital = 270 x 0.900 = EUR 242.9m. Note the marginal slicing: only the second EUR 1bn slice attracts 15%. The most common error is applying 15% to the entire EUR 2bn BI.

Traps

  • Applying one BIC coefficient to total business indicator instead of slicing.
  • Applying ILM to a bucket 1 bank, where ILM is 1 by definition.
  • Classifying a rogue trader as external fraud rather than internal fraud.
  • Letting model developers sign off their own validation or set their own tier.
  • Treating reputational damage as an operational risk capital item.