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FRM Part II · FRM Exam Part II · Integrated Risk Management

A bank's operational risk team builds a scenario of a prolonged outage at a critical third-party cloud provider. Which element is most important to include so the scenario supports integrated stress testing?

The scenario should include second-round effects across risk types, such as customer attrition, liquidity outflows, penalties and credit impacts, together with the outage's severity and duration. Looking only at direct costs or average historical losses would ignore the tail and the cross-risk transmission that integrated stress testing aims to reveal.

  1. AOnly the direct cost of vendor fees refunded
  2. BSecond-round effects such as customer attrition, liquidity outflows, regulatory penalties and credit impacts, along with the severity and duration of the outageCorrect
  3. CA statement that the event is highly improbable and so excluded from capital planning
  4. DThe historical average of the bank's small operational loss events

Explanation

Integrated scenarios must capture knock-on effects across risk types, plus severity and duration. Focusing on vendor refunds or on average small losses ignores tail and cross-risk effects, and excluding unlikely events defeats the purpose of stress testing.

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