Step 1: Understanding Linked Losses in Operational Risk

In operational risk events, a single event can impact multiple business lines or event types (e.g., IT

failure affecting retail banking and wealth management).

Proper loss attribution is important for accurate risk reporting and regulatory compliance under

Basel III.

Step 2: Why Option C is Correct

Basel III and PRMIA guidance allow institutions flexibility in how to allocate linked losses:

Entire loss can be allocated to the business line with the largest loss impact for simplified reporting.

Loss can be pro-rated across affected business lines for more accurate attribution.

Step 3: Why the Other Options Are Incorrect

Option A ("Allocate entire loss to the business line with the greatest loss") → Partially correct, but

not always required—some firms prefer pro-rating.

Option B ("Pro-rate the loss") → Partially correct, but allocating to the largest impacted business line

is also acceptable.

Option D ("Each business line decides how to treat losses") → Incorrect because loss allocation

should follow a defined policy, not business line discretion.

PRMIA Risk Reference Used:

Basel III Operational Risk Framework – Discusses loss attribution for multi-line impact events.

PRMIA Loss Event Management Guidelines – Supports both full allocation and pro-rating.

Final Conclusion:

Firms can either allocate the full loss to the most impacted business line or pro-rate it across affected

lines, making Option C the correct answer.