FRM Part II · FRM Exam Part II · Risk Identification

A bank's framework uses a three-level taxonomy: Level 1 event type, Level 2 category, Level 3 activity. Business lines have started mapping the same incident, a mis-keyed payment instruction causing a 2 million loss, to different Level 1 categories (some choose Internal Fraud, others Execution, Delivery and Process Management). Which action best addresses the root problem for consistent identification?

The bank should publish clear category definitions with decision rules and examples, such as distinguishing intent from error, and review classifications centrally. Inconsistent mapping comes from ambiguity, so local taxonomies, arbitrary default rules or removing a level would not give comparable, reliable loss data.

1. AAllow each business line to define its own Level 1 categories to reflect local practice
2. BPublish clear category definitions with decision rules and examples, such as intent versus error, and apply central review of classificationsCorrect
3. CClassify all losses above 1 million as Execution, Delivery and Process Management by default
4. DRemove Level 3 to reduce the number of categories