FRM Part I · FRM Exam Part I · Operational Risk
Which statement best describes the main advantage of using external loss data when identifying and assessing operational risks?
External loss data shows the bank severe operational events experienced by other firms that it has not yet suffered itself. This helps fill gaps in sparse internal tail data and informs scenarios, though it must be scaled and screened for relevance and does not replace internal data.
- AIt exposes the bank to severe events that have occurred at other firms but not yet at the bank itselfCorrect
- BIt eliminates the need for scenario analysis and internal loss collection
- CIt is perfectly scaled to the bank's own size, products and control environment
- DIt guarantees that loss frequencies are lower than internal estimates
Explanation
External data lets a bank learn from tail events at peers that its own short history may lack, informing scenarios and capital models. It still needs scaling and relevance adjustment, and it does not replace internal data or scenario analysis.
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