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FRM Part II · FRM Exam Part II · Risk Identification

A risk manager is building an emerging risk identification process. Which feature best distinguishes an emerging risk from an existing known risk in this context?

An emerging risk is one that is new or evolving, with uncertain nature, likelihood and impact, which makes it hard to quantify from historical data. That is why institutions use horizon scanning and scenario thinking rather than relying on loss history.

  1. AIt has already produced material losses in the industry and is well quantified
  2. BIt is evolving or newly appearing, with uncertain nature, likelihood and impact, and so is hard to quantify with historical dataCorrect
  3. CIt is always an external event outside the bank's control
  4. DIt is a risk that has been fully mitigated by existing controls

Explanation

Emerging risks are new or changing, and their uncertainty means historical data is of limited use, so qualitative tools such as horizon scanning and scenario analysis are used. They need not be external only, and well-quantified or fully mitigated risks are by definition not emerging.

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