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

An operational risk analyst notices that a bank's internal loss database records events by the date they were discovered, not the date they occurred. Several fraud losses occurred in 2019 but were booked in 2022. What is the most direct effect on measurement?

The main effect is distorted annual frequency and trend analysis. Events are placed in the wrong years, so analysts may misread control effectiveness or loss trends. It does not mechanically inflate severity or make the data unusable, though dating should be corrected.

  1. ASeverity estimates are biased upward because discovery lags increase loss amounts mechanically
  2. BFrequency trends by year are distorted, which can mislead time-based analysis and control assessmentsCorrect
  3. CCorrelation between business lines is guaranteed to fall to zero
  4. DThe data become unusable for any scenario analysis

Explanation

Booking by discovery date shifts events across years, so annual frequency and trend analysis, and the link to the control environment at the time of occurrence, are distorted. It does not mechanically raise severity or eliminate correlation, and the data remain usable with adjustment.

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