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FRM Part II · FRM Exam Part II · Integrated Risk Management

A bank is deciding how to integrate risk types in a single enterprise model. Which is a recognized challenge specific to aggregating market, credit and operational risk?

The key challenge is that market, credit and operational risk are measured with different horizons, data quality and distribution shapes, so putting them on a common basis and estimating cross-risk dependence is difficult. Reliable observed correlations and normality are not available.

  1. AAll three risk types use identical time horizons and confidence levels by regulation, so aggregation is trivial
  2. BRisk types differ in measurement horizon, data quality and distribution shape, making a common metric difficultCorrect
  3. CAggregation always requires assuming normality, which fits operational loss data well
  4. DCorrelations between risk types can be directly observed from long, reliable loss histories

Explanation

Market risk is often measured over short horizons with abundant data, credit over a year with sparse default data, and operational risk with heavy-tailed, scarce loss data. These differences complicate a common metric and dependence estimation. Operational losses are not normal, and cross-risk correlations are hard to observe.

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