FRM Part II · FRM Exam Part II · Risk Identification
A bank's operational risk function is building a taxonomy so that loss events can be classified consistently across business lines. Which design feature is most important for the taxonomy to support aggregation and comparison of risks across the firm?
The taxonomy should use mutually exclusive, collectively exhaustive categories with clear definitions. This lets events be mapped consistently, so risks can be aggregated and compared across business lines. Local naming, loss-only scope, or amount-based classification would undermine consistency and omit causes and emerging risks.
- AUsing mutually exclusive and collectively exhaustive categories with clear definitionsCorrect
- BAllowing each business line to define its own category names to reflect local practice
- CLimiting the taxonomy to risks that have already produced financial losses
- DClassifying events only by the amount of loss rather than by cause or type
Explanation
A common taxonomy needs categories that do not overlap and cover all operational risks, with clear definitions, so events are mapped consistently. Business-line-specific names prevent aggregation. Restricting to past losses omits emerging risks, and classifying only by amount loses cause information.
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