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

A bank's risk and control self-assessment (RCSA) program is reviewed. Business units identify risks by listing only events that have caused losses in the past three years. A reviewer argues this is inadequate for risk identification. Which is the strongest reason?

The strongest reason is that loss-only identification is backward-looking. It misses rare, severe events and emerging risks that have not yet produced losses, so it needs forward-looking tools such as scenario analysis and RCSA. Loss data is still valuable, just insufficient alone.

  1. AHistorical loss data cannot be used for any operational risk purpose
  2. BLoss-based identification is backward-looking and misses low-frequency, high-severity risks and emerging risks that have not yet produced lossesCorrect
  3. CBusiness units are legally prohibited from identifying risks themselves
  4. DLoss events are always fully captured, so identification adds nothing

Explanation

Operational risk identification should combine loss data with forward-looking tools such as scenario analysis, RCSA, and change-risk reviews. A purely historical view omits rare severe events and new risks like new products or technologies. Loss data remains useful, so the claim that it has no use is too extreme.

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