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FRM Part II · FRM Exam Part II · Risk Identification

A bank's operational risk function is building a taxonomy to classify loss events consistently across business lines. Which of the following is the primary benefit of using a standardized taxonomy with defined event-type categories?

The main benefit is consistency: a standardized taxonomy lets the bank classify loss events, risks and controls in the same way across business lines, so data can be aggregated, compared and reported meaningfully. It does not prevent losses or replace self-assessments.

  1. AIt guarantees that operational losses will fall below the bank's risk appetite
  2. BIt allows loss data, risk assessments and controls to be aggregated and compared consistently across the firmCorrect
  3. CIt removes the need for business lines to perform their own risk and control self-assessments
  4. DIt converts operational risk into market risk so it can be hedged

Explanation

A common taxonomy gives the firm a shared language so that loss events, risk assessments and controls can be mapped to the same categories and aggregated or benchmarked. It does not eliminate losses, replace self-assessments or convert risk types.

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