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

Which statement best describes the role of an internal loss database in an operational risk management framework?

An internal loss database captures the bank's own actual loss events, classified by cause, event type and business line, supporting root cause analysis, control improvement and risk measurement. It does not hold hypothetical scenarios and rarely contains enough tail events, so external data and scenarios complement it.

  1. AIt captures the bank's own loss events by cause and business line to support analysis, root cause identification and risk measurement inputsCorrect
  2. BIt is a forward-looking list of hypothetical extreme events created by senior executives
  3. CIt records only losses exceeding the bank's capital buffer
  4. DIt substitutes for external data because internal losses are always sufficient to model tail risk

Explanation

Internal loss data records actual events, categorized by cause, event type and business line, for root cause analysis and as a measurement input. Hypothetical events belong to scenario analysis. Internal data usually have few tail events, so external data and scenarios are still needed.

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