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FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience

A risk manager wants the bank's operational risk loss taxonomy to support consistent aggregation and comparison of losses across business lines. Which design feature is most consistent with sound practice?

A common taxonomy with mutually exclusive and collectively exhaustive event types, applied consistently across the bank, is best. It lets losses be aggregated, compared and mapped to causes. Separate business-line definitions, catch-all categories or accounting-based labels undermine comparability and risk analysis.

  1. AAllow each business line to define its own event categories for flexibility
  2. BUse a common, mutually exclusive and collectively exhaustive set of event types applied consistently across the bankCorrect
  3. CClassify every loss under a single catch-all category to simplify reporting
  4. DClassify losses only by the financial statement line item where they were booked

Explanation

A taxonomy supports aggregation and benchmarking only if categories are clear, consistent and cover all events without overlap. Business-line-specific definitions destroy comparability, and a catch-all or accounting-based scheme hides the causes needed for risk management.

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