General Studies · Risk Management

A large multinational bank is subjected to a comprehensive Internal Audit which identifies a critical flaw in its retail lending process. The flaw allows junior loan officers, under pressure to meet targets, to slightly overstate the income of self-employed applicants, leading to a higher probability of loan default in the event of an economic downturn. This systemic weakness is projected to impact the bank's future earnings through increased loan loss provisions. This scenario best exemplifies a breakdown in the management of which two primary categories of risk simultaneously, and what is the appropriate mitigation tool that the bank's risk management framework should prioritize to address the source of the risk?