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FRM Part II · FRM Exam Part II · Risk Identification

A bank runs a stress test for operational risk that assumes a severe economic downturn. Which feature distinguishes this stress test from a typical operational risk scenario analysis?

A stress test applies adverse conditions, such as a severe downturn, and assesses how operational losses like fraud or litigation might increase across the firm. This differs from a scenario analysis centered on a specific plausible loss event, and it still requires expert judgment.

  1. AIt examines how operational losses, such as fraud or litigation, might rise under adverse macroeconomic conditions across the portfolioCorrect
  2. BIt relies exclusively on historical average losses with no assumptions about conditions
  3. CIt is performed only for credit risk and cannot involve operational losses
  4. DIt eliminates the need for expert judgment

Explanation

Stress testing applies adverse conditions, such as a downturn, to see how loss exposures change, for example higher fraud or litigation. Scenario analysis typically focuses on specific plausible loss events. Stress tests still require judgment and can apply to operational risk.

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