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

A bank's operational risk team runs an RCSA in which business line managers rate the inherent likelihood and impact of each risk, then rate the effectiveness of existing controls to arrive at a residual rating. Which statement correctly describes residual risk in this process?

Residual risk is the level of operational risk remaining after the effect of existing controls is taken into account. Inherent risk is the level before controls, so residual risk is the inherent rating adjusted for how well current controls actually operate.

  1. AThe risk remaining after the effect of existing controls is taken into accountCorrect
  2. BThe risk level before any controls are applied
  3. CThe risk after the bank has bought insurance only
  4. DThe risk that remains after all possible future controls have been implemented

Explanation

Residual risk is the exposure left after considering the mitigating effect of controls that currently exist. Inherent risk is the pre-control level. Residual risk does not assume controls not yet implemented.

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