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FRM Part II · FRM Exam Part II · Basel III: Finalising Post-crisis Reforms

A bank's operational risk loss data governance review finds that a 4 million euro loss was recorded under the business unit that booked the settlement, while the event originated in a different unit's failed process. According to Basel principles on loss data, which is the correct approach?

The loss should be mapped to the unit whose process failure caused it, under a documented policy covering centralised functions and grouping of related events. Recording it where cash settled, excluding it, or spreading it evenly all distort the causal picture and reduce loss data quality.

  1. ARecord the loss in the unit where the cash settlement occurred because it is the accounting location
  2. BAllocate the loss to the unit that caused the event, and keep a documented policy for attributing losses from centralised functions and for grouping related eventsCorrect
  3. CExclude the loss from the data set because it spans two units
  4. DSplit the loss equally between all business units in the bank

Explanation

Loss data should be attributed to the business line and event type where the loss arose, with documented criteria for centralised functions and for grouping related events. Booking by accounting location misstates causal exposure. Excluding or equal-splitting the loss distorts data quality.

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