FRM Part II · FRM Exam Part II · Risk Identification
A bank wants its operational risk stress testing to be useful for identifying vulnerabilities. Which design feature best supports this objective?
The best design links scenarios to specific business processes and control weaknesses and adds reverse stress testing to find events that could threaten the bank's viability. Scenarios limited to past events, a single risk category or a one-off exercise fail to reveal emerging and interconnected vulnerabilities.
- AUsing only scenarios that mirror past events so that results can be validated against actual losses
- BLinking scenarios to specific business processes and control weaknesses, and including reverse stress testing to find events that would threaten viabilityCorrect
- CLimiting scenarios to a single risk category to keep results simple
- DRunning scenarios once at inception and never updating them
Explanation
Effective stress testing ties scenarios to processes and controls and uses reverse stress testing to identify events that could breach viability thresholds. Past-only, single-category or static scenarios miss emerging, interconnected and evolving risks.
Did you get it right without looking?
One question tells you little. A timed set on Risk Identification shows your real accuracy, how long you take and where you lose marks.
More Risk Identification questions
- A bank's operational risk team is selecting indicators to monitor its payments processing unit. Which of the following best describes a key …
- 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 co…
- During a process mapping exercise of a loan origination workflow, an analyst finds that a credit officer manually re-keys data from a PDF in…
- A bank compares its RCSA results with other operational risk data. The fraud RCSA for retail lending rates residual risk as Low and controls…
- A trader enters a trade for 10 million units instead of the intended 1 million because of a keying mistake. The bank's systems lack a size-l…
- A bank's operational risk function is building a taxonomy so that loss events can be classified consistently across business lines. Which de…