FRM Part I · FRM Exam Part I · Operational Risk

A bank has a stable operational loss database. After a new product launch, the business argues that because internal loss data show no large events for the product, the scenario analysis for it should assign a very low severity. Which response best reflects sound operational risk framework practice?

The sound response is to combine internal data, relevant external loss data and structured expert judgment with challenge. A new product has little loss history and severe events are rare in internal data, so relying only on internal data would understate tail risk.

1. AAccept the argument since internal data are the most objective input
2. BRemove the product from scope until losses are observed
3. CUse only external data and ignore the business's views to avoid bias
4. DCombine internal data, relevant external loss data, and structured expert judgment, since a new product lacks history and tail events are rarely in internal dataCorrect