FRM Part II · FRM Exam Part II · Risk Identification
A bank's operational risk team is preparing to run scenario analysis workshops to identify severe but plausible loss events. Which of the following best describes the primary purpose of scenario analysis in operational risk identification?
Scenario analysis is used to assess the potential impact of low-frequency, high-severity events that historical loss data may not capture. It is forward-looking and relies on expert judgment, complementing rather than replacing internal and external loss data, and it does not give a precise capital number.
- ATo replace internal loss data entirely when the bank has a long loss history
- BTo produce a single precise capital figure that supervisors must accept without challenge
- CTo assess the potential impact of low-frequency, high-severity events that historical data may not adequately captureCorrect
- DTo confirm that all key risk indicators are within their approved thresholds
Explanation
Scenario analysis is a forward-looking tool that uses expert judgment to explore rare, severe events that internal data rarely contains. It complements, rather than replaces, loss data. It does not give a precise capital figure, and KRI threshold monitoring is a different activity.
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