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FRM Part II · FRM Exam Part II · Digital Resilience and Financial Stability: The Quest for Policy Tools in the Financial Sector

A risk analyst compares two ways of modelling extreme cyber losses for the financial sector. Historical data are scarce and incidents are highly correlated across firms. Which approach is most appropriate for assessing systemic impact?

Scenario-based analysis of severe but plausible events, such as a common-provider failure, supplemented by tail-focused statistics, is most appropriate. Scarce data, fat tails and cross-firm correlation make averages, independence assumptions and short loss histories understate systemic cyber losses.

  1. AUse average annual loss per firm multiplied by the number of firms
  2. BUse scenario-based analysis of severe but plausible events, including common-provider failure, alongside tail-focused statisticsCorrect
  3. CAssume losses are independent and normally distributed
  4. DRely solely on the past three years of reported losses

Explanation

Sparse data, fat tails and correlation make simple averages and normal independence assumptions understate systemic loss. Scenario analysis of severe but plausible events captures contagion and common-mode failure. Option A ignores correlation and tails; C and D understate risk given limited history.

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