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

A bank wants its risk identification process to capture emerging risks that have not yet produced losses, such as a new payments platform with untested controls. Which tool is most appropriate for this purpose?

Scenario analysis with business experts is the best tool. It is forward-looking and can surface plausible events for a new platform with no loss history. Internal loss data, industry fines and back-testing all rely on past experience, so they cannot identify emerging risks that have not yet materialized.

  1. AAnalysis of the internal loss event database
  2. BScenario analysis and forward-looking workshops with business expertsCorrect
  3. CBack-testing of last year's capital estimate
  4. DRegulatory reports of historical industry fines

Explanation

Loss data and fines are backward-looking and cannot reveal risks with no loss history. Scenario analysis with business experts is forward-looking and can identify plausible events from new products and untested controls. Back-testing capital looks at past estimates rather than identifying new risks.

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