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

A bank's RCSA results show that nearly all business units rate their residual risks as low and their controls as effective, yet internal audit and the loss event database show frequent control failures in the same units. Which is the most likely weakness of the RCSA process that explains this?

The most likely cause is optimism and subjectivity bias in the self-assessment, with no independent challenge. Managers tend to rate their own controls favorably. Second-line review and comparison with loss data, audit findings and indicators are needed to validate the ratings.

  1. AOptimism and subjectivity bias in self-assessment without independent challengeCorrect
  2. BExcessive use of quantitative scenario analysis
  3. COverreliance on external loss data
  4. DToo frequent use of key risk indicators

Explanation

Self-assessments are subjective and managers may understate risks or overstate control effectiveness. Independent challenge by the second line, and comparison against loss data, audit findings and KRIs, corrects this. The other options do not explain a systematic mismatch of favorable self-ratings versus observed failures.

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