FRM Part II · FRM Exam Part II · Risk Identification

A bank's operational risk function is building its risk taxonomy. A risk manager proposes classifying events by the underlying cause (people, process, systems, external events) and separately by the type of loss event (for example, internal fraud, external fraud, damage to physical assets). Which statement best describes the benefit of using both a cause-based and an event-type classification?

Using both classifications lets the bank record what happened (event type) and why it happened (cause), supporting consistent loss aggregation and root-cause remediation. It does not replace self-assessments, guarantee single counting of capital, or remove legal losses from the operational risk definition.

1. AIt lets the bank map the same loss to what happened and to why it happened, supporting both loss aggregation and root-cause remediationCorrect
2. BIt eliminates the need for risk and control self-assessments because causes are already known
3. CIt ensures that each loss is counted in only one category, so double counting of capital is impossible
4. DIt allows the bank to exclude legal and compliance losses from the operational risk definition