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FRM Part II · FRM Exam Part II · Risk Reporting

A bank's operational risk team receives loss event data from three subsidiaries. One subsidiary records losses net of insurance recoveries, another gross, and the third records only losses above a threshold of USD 50,000 while the others use USD 10,000. The head of risk wants to produce a consolidated loss report. What is the most appropriate first step?

The right first step is to define a common loss data standard and map each subsidiary's data to it before aggregating. The subsidiaries differ on gross versus net treatment and collection thresholds, so combining them directly would be inconsistent; standardization yields comparable, complete figures without discarding or omitting data.

  1. ASum the reported figures and footnote the differences in the report
  2. BApply the USD 50,000 threshold to all subsidiaries and discard the remaining events
  3. CExclude the two subsidiaries with differing conventions from the consolidated report
  4. DDefine a common data standard for loss recording and map each subsidiary's data to it before aggregatingCorrect

Explanation

Aggregation requires comparable data. A common standard for gross/net treatment and thresholds, with mapping of existing data, preserves information and gives consistent results. Simple summing hides inconsistency, discarding data loses information, and excluding subsidiaries produces an incomplete view.

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