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FRM Part II · FRM Exam Part II · Risk Identification

A bank's payments division runs an annual Risk and Control Self-Assessment. Business line managers rate inherent risk, control effectiveness and residual risk for each process. Which feature best describes the main strength of the RCSA approach in identifying operational risk?

RCSA's main strength is that it uses the knowledge of the people who run the processes to identify risks and judge control effectiveness, giving a forward-looking view. It is subjective and periodic, so it needs independent challenge and does not produce precise loss distributions or replace key risk indicators.

  1. AIt produces statistically precise loss distributions from internal loss data
  2. BIt draws on the knowledge of the people who run the processes, giving a forward-looking view of risks and controlsCorrect
  3. CIt removes the need for independent review by the second line of defense
  4. DIt replaces key risk indicators because it measures risk continuously

Explanation

RCSA relies on front-line process owners' knowledge to identify risks and assess controls, giving a forward-looking, process-level view. It is subjective, so it does not give precise loss distributions, does not remove the need for challenge, and is periodic rather than continuous like KRIs.

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