What does the closure of a foreign bank's operations, including ACH processing, due to economic hardship illustrate in terms of risk?

What does the closure of a foreign bank's operations, including ACH processing, due to economic hardship illustrate in terms of risk?

• A. Operational Risk
• B. Credit Risk
• C. Fraud Risk
• D. Systemic Risk

Answer: (D)

The closure of a foreign bank's operations, including its ACH processing, due to economic hardship illustrates systemic risk. Systemic risk refers to the potential for a significant event, such as a bank's failure, to trigger widespread instability or collapse within the financial system. When a foreign bank ceases operations, it can have ripple effects across multiple financial institutions and markets, especially if that bank plays a crucial role in international transactions or ACH processing. This situation can lead to liquidity issues, loss of confidence in the banking system, and disruptions in payment systems and services that affect a broad range of stakeholders. In contrast, operational risk focuses on failures arising from inadequate or failed internal processes, systems, or personnel. Credit risk pertains to the possibility of loss due to a borrower's failure to repay a loan or meet contractual obligations. Fraud risk is related to the potential for losses due to deceptive practices. While all these types of risks are important in the banking sector, the situation described specifically points to the interconnectedness inherent in financial systems, which is characteristic of systemic risk.

The closure of a foreign bank's operations, including its ACH processing, due to economic hardship illustrates systemic risk. Systemic risk refers to the potential for a significant event, such as a bank's failure, to trigger widespread instability or collapse within the financial system. When a foreign bank ceases operations, it can have ripple effects across multiple financial institutions and markets, especially if that bank plays a crucial role in international transactions or ACH processing. This situation can lead to liquidity issues, loss of confidence in the banking system, and disruptions in payment systems and services that affect a broad range of stakeholders.

In contrast, operational risk focuses on failures arising from inadequate or failed internal processes, systems, or personnel. Credit risk pertains to the possibility of loss due to a borrower's failure to repay a loan or meet contractual obligations. Fraud risk is related to the potential for losses due to deceptive practices. While all these types of risks are important in the banking sector, the situation described specifically points to the interconnectedness inherent in financial systems, which is characteristic of systemic risk.