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FRM Part II · FRM Exam Part II · Risk Measurement and Assessment

A bank aggregates RCSA results across 40 business units to prioritize remediation. Unit A rates a risk 'high' on a 3-level scale (low, medium, high) while Unit B rates a similar risk 'high' on a 5-level scale where 'high' is the fourth level. A risk committee member proposes averaging the numeric scores directly to rank enterprise risks. What is the principal problem with this approach?

The problem is that the units use different, uncalibrated scales, and ordinal ratings are not comparable across them. A 'high' on one scale is not the same exposure as a 'high' on another, so averaging the scores gives misleading enterprise rankings. A common scale with defined bands is needed.

  1. AThe scales are not calibrated to common definitions, so ordinal ratings are not comparable and averaging them gives misleading rankingsCorrect
  2. BAverages cannot be computed for qualitative data under Basel rules
  3. CAggregation is prohibited when more than 30 units participate
  4. DThe 5-level scale always overstates risk

Explanation

RCSA ratings are ordinal and depend on the scale and the definitions of likelihood and impact bands. Without a common, calibrated scale, equal labels mean different exposures, so numeric averaging is not meaningful. The other statements are not real rules or are unsupported.

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