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FRM Part II · FRM Exam Part II · Risk Identification

A bank scores RCSA risks using inherent risk = likelihood x impact on 1-5 scales. For a process, likelihood is 4 and impact is 5. The key control is assessed as reducing the inherent risk score by 60%. Management's risk appetite sets a maximum acceptable residual score of 6. What is the residual score and the conclusion?

Inherent risk is 4 x 5 = 20. A control that cuts it by 60% leaves 40% of 20, a residual score of 8. This exceeds the appetite limit of 6, so further mitigation or control improvement is required.

  1. AResidual score 8; exceeds appetite, so further mitigation is neededCorrect
  2. BResidual score 12; exceeds appetite, so further mitigation is needed
  3. CResidual score 8; within appetite because it is below 10
  4. DResidual score 6; exactly at appetite, so no action is needed

Explanation

Inherent = 4 x 5 = 20. A 60% reduction leaves 40% of 20 = 8. Since 8 exceeds the appetite of 6, action is required. The 12 figure comes from subtracting 60% incorrectly as 60% retained (0.6 x 20), and 6 is a made-up value.

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