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

A bank has a taxonomy with Level 1 event types and Level 2 sub-categories. Two business lines record similar phishing-related losses, one under 'External fraud' and the other under 'Business disruption and system failures'. What is the most important weakness this reveals?

The weakness is inconsistent application of the taxonomy. When similar phishing losses are mapped to different categories, loss data cannot be reliably aggregated, compared across business lines or used for analysis. The remedy is clearer category definitions, mapping guidance and data quality review.

  1. AInsufficient risk appetite limits
  2. BInconsistent application of the taxonomy, reducing comparability and aggregation of loss dataCorrect
  3. COverreliance on key risk indicators
  4. DExcessive granularity of Level 1 categories

Explanation

Identical event types classified differently signals unclear definitions or inadequate guidance, which undermines aggregation, benchmarking and scenario analysis. It does not directly relate to appetite limits or KRIs, and the issue is inconsistent mapping, not too many Level 1 categories.

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