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

A bank combines internal loss data with external consortium data in its operational risk model. A validator raises a concern that external losses come from much larger institutions. Which action best addresses this specific data-quality issue?

The best action is to scale the external losses for size and business mix and to filter them for relevance to the bank's own profile. This reduces scale bias while keeping the valuable tail information that external data provide, unlike discarding the data outright.

  1. ADiscard external data and use only internal data
  2. BApply scaling to external losses to reflect differences in size and business mix, and check the relevance of each data sourceCorrect
  3. CMultiply all external losses by the bank's tax rate
  4. DUse only external losses above the 99.9th percentile

Explanation

External data have scale bias because the reporting firms differ in size and activities. Scaling and relevance filtering make the data comparable. Discarding the data loses tail information, and the other options have no statistical rationale.

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