What type of risk arises from a financial institution that does not balance its Federal Reserve account?

What type of risk arises from a financial institution that does not balance its Federal Reserve account?

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

Answer: (A)

Operational risk is associated with failures in internal processes, systems, or people, which can lead to adverse financial outcomes. When a financial institution does not properly manage its Federal Reserve account, particularly in terms of balancing it, this can result in operational issues such as liquidity shortfalls, inability to meet settlements, or errors in transaction processing. By not balancing the account, the institution may also expose itself to unforeseen penalties or increased costs, thereby impacting its operational efficiency. This illustrates how operational risk materializes not just from technological failures but also from inadequate management of vital financial processes, such as maintaining proper reserves in a Federal Reserve account. The other types of risks listed do not specifically relate to the scenario of not balancing the Federal Reserve account in the same immediate way, as systemic risk pertains to the failure of an entire financial system, credit risk relates to the likelihood of a borrower defaulting on a loan, and fraud risk concerns potential deceitful actions that can lead to financial loss.

Operational risk is associated with failures in internal processes, systems, or people, which can lead to adverse financial outcomes. When a financial institution does not properly manage its Federal Reserve account, particularly in terms of balancing it, this can result in operational issues such as liquidity shortfalls, inability to meet settlements, or errors in transaction processing.

By not balancing the account, the institution may also expose itself to unforeseen penalties or increased costs, thereby impacting its operational efficiency. This illustrates how operational risk materializes not just from technological failures but also from inadequate management of vital financial processes, such as maintaining proper reserves in a Federal Reserve account.

The other types of risks listed do not specifically relate to the scenario of not balancing the Federal Reserve account in the same immediate way, as systemic risk pertains to the failure of an entire financial system, credit risk relates to the likelihood of a borrower defaulting on a loan, and fraud risk concerns potential deceitful actions that can lead to financial loss.