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

A bank's operational risk team runs a Risk and Control Self-Assessment (RCSA) workshop for its payments business. Business managers rate inherent risk and control effectiveness for each process. Which statement best describes the residual risk that results from this exercise?

Residual risk is the level of operational risk remaining after the effect of existing controls is taken into account. It is derived from inherent risk and control effectiveness in the RCSA. Inherent risk is the pre-control level, and planned but unimplemented controls do not reduce residual risk.

  1. AThe risk remaining after taking into account the effectiveness of existing controlsCorrect
  2. BThe risk that exists before any controls are applied
  3. CThe risk that remains after all planned future controls are implemented
  4. DThe maximum loss recorded in the internal loss database for the process

Explanation

Residual risk is the exposure left after the existing controls have been considered, i.e. inherent risk adjusted for control effectiveness. Inherent risk is the pre-control view, which is the common confusion. Future planned controls are not counted until they are in place and tested.

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