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FRM Part I · FRM Exam Part I · Operational Risk

A bank's operational risk team asks each business line manager to score the likelihood and impact of key risks on a 1-to-5 scale, then plots the results on a heat map. Which of the following is the most significant limitation of this risk and control self-assessment (RCSA) approach?

The main weakness of RCSA is subjectivity. Managers score likelihood and impact from their own judgment, so results can be skewed by optimism, incentives or limited awareness. RCSA is forward-looking and qualitative and does not need long loss histories, so the other statements are incorrect.

  1. AIt cannot be applied to forward-looking risks
  2. BScores are subjective and may be biased by managers' perceptions and incentivesCorrect
  3. CIt requires at least ten years of internal loss data
  4. DIt produces only quantitative capital figures that cannot be discussed qualitatively

Explanation

RCSA relies on the judgment of the people closest to the process, so scores can be biased by optimism, incentives or limited awareness. It is forward-looking and qualitative, and it does not require long loss histories. The other options misstate how RCSA works.

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