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FRM Part II · FRM Exam Part II · Range of Practices and Issues in Economic Capital Frameworks

Which practice best addresses data quality risk in an economic capital framework?

Data governance with reconciliation to source systems, documented data lineage and a defined treatment of missing data best addresses data quality risk. This makes inputs reliable and auditable, whereas dropping outliers would remove precisely the tail information an economic capital model needs.

  1. AUsing the same data without reconciliation to avoid inconsistencies across systems
  2. BReplacing internal loss data with external data in every case
  3. CEstablishing data governance with reconciliation to source systems, documented lineage and treatment of missing dataCorrect
  4. DExcluding all observations that are outliers

Explanation

Sound data governance, lineage and reconciliation make inputs reliable and auditable. Blanket exclusion of outliers removes tail information that capital models need, and replacing internal data entirely loses bank-specific information.

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