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FRM Part II · FRM Exam Part II · Risk Measurement and Assessment

A bank's operational risk team is setting up an internal loss data collection process. Which design choice best supports the use of the data in operational risk measurement and capital modeling?

The best design records gross losses, recoveries, dates and business line using a consistent taxonomy. This lets the bank model frequency and severity, aggregate across units and analyze recoveries, whereas high thresholds or unit-specific categories lose information or prevent comparison.

  1. ARecord only losses above a very high threshold to keep the database small and focused on tail events
  2. BRecord gross loss amounts, recoveries, event dates and business line classification using a consistent taxonomyCorrect
  3. CRecord losses only when they are fully settled in the general ledger, ignoring dates of discovery and occurrence
  4. DAllow each business unit to define its own loss categories to reflect local practice

Explanation

Useful loss data needs consistent classification and the gross loss, recoveries and key dates so that frequency and severity can be modeled and recoveries understood. A very high threshold discards information needed for frequency and body-of-distribution estimation. Unit-specific taxonomies prevent aggregation and comparison.

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