FRM Part II · FRM Exam Part II · Risk Governance
A bank's operational risk loss events reported by business units fell 40% after the introduction of a scorecard that reduces unit bonuses by 5% for each reported event above a threshold. Audit finds no change in actual control quality, and near-miss reports have vanished. Which conclusion is most appropriate?
The drop most likely reflects under-reporting caused by the penalty, not real improvement, since control quality is unchanged and near-misses disappeared. The bank should replace the metric with incentives for timely, accurate reporting and remediation, because punishing reported events discourages the transparency risk governance depends on.
- AOperational risk has genuinely declined and the threshold should be tightened
- BThe incentive has likely induced under-reporting, so the metric should be replaced with measures rewarding timely, accurate reporting and remediationCorrect
- CLoss data are now more reliable because units are more accountable
- DNear-miss reporting should be abolished since it adds no value
Explanation
Unchanged control quality alongside a sharp drop in reports and vanished near-misses indicates behavioral response to a punitive metric, not real improvement. Penalizing reporting creates perverse incentives; reward transparent reporting and remediation instead. Tightening the threshold would worsen concealment, and near-misses are valuable leading indicators.
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