FRM Part I · FRM Exam Part I · Operational Risk
A bank's risk and control self-assessment (RCSA) process rates a process's inherent risk as high and its control effectiveness as strong, giving a moderate residual risk. Which statement best describes how residual risk relates to these inputs?
Residual risk is the level of risk remaining after the effect of existing controls is applied to inherent risk. Inherent risk is the pre-control exposure. Realized losses and regulatory capital charges are different concepts and are not what an RCSA means by residual risk.
- AResidual risk is the risk remaining after considering the effect of existing controls on inherent riskCorrect
- BResidual risk is the risk before any controls are applied
- CResidual risk is the loss amount actually realized during the year
- DResidual risk is the capital charge computed under the standardized approach
Explanation
Inherent risk is the exposure before controls; residual risk is what remains after the mitigating effect of existing controls. Realized losses are outcomes, not an assessment, and regulatory capital charges are a separate measure.
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