Learning outcomes: Explain the use of a Risk Control Self Assessment (RCSA) and key risk indicators (KRI’s) in identifying, controlling, and assessing operational risk exposures. Describe and assess the use of scenario analysis in managing operational risk, and identify biases and challenges which can arise when using scenario analysis.
Questions:
602.1. Silverfind Financial International is planning to conduct a risk control self-assessment (RCSA) for each of its business units. Which of the following is MOST LIKELY to be a feature or element of the firm's RCSA?
a. Staff within a business unit are excluded from providing input into their own business unit's RCSA scorecard in order to avoid conflicts of interest
b. Any process with an inherent risk that is greater than its residual risk will be assigned a "red flag" because this is a situation that requires a process fix
c. Managers will first identify and assess inherent risks by making no inferences about controls embedded in the process; i.e., controls are assumed to be absent
d. In order to estimate realistic outcomes, risks are identified by assuming the mitigation impact of in-place controls; that is, the risk exposure sought is net of control and mitigation
602.2. Streethigh Bank is developing key risk indicators (KRI) for their Equity Settlement Process. The KRIs will be used as a proxy for the quality of the control environment and will directly inform the bank's OpRisk model. Assuming the bank it utilizing best practices in developing its KRIs, which of the following is mostly likely to be TRUE?
a. Collection of KRIs will be automated directly from the firm's operational systems at the cost center level
b. All of the bank's key risk indicators will be standardized on the same Red/Amber/Green (RAG) scale which can be quantified as 1/2/3
c. A majority of the bank's key risk indicators (KRIs) are qualitative; realistically, the few remaining quantitative KRIs are either measures with nominal or ordinal variables
d. Because the model concerns the banks own operational losses, external factors such as stock market volatility or interest rates will be excluded from the final quantitative model
602.3. According to Cruz, Peters and Shevchenko, scenario analysis is a key tool in operational risk measurement and "for a significant number of firms, the scenario analysis program is the pillar of their framework." (Source: Marcelo G. Cruz, Gareth W. Peters, and Pavel V. Shevchenko, Fundamental Aspects of Operational Risk and Insurance Analytics: A Handbook of Operational Risk (New York: John Wiley & Sons, 2015))
In regard to scenario analysis, each of the following is true EXCEPT which is not true?
a. Though there are different approaches to run a scenario workshop, three approaches are widely used: structured workshops, surveys, or individualized discussions
b. Scenario analysis is NOT effective for emerging risks due to a lack of actual loss experience and because there will likely exist a disparity of opinions among experts on loss sizes and frequencies
c. Scenarios estimates are usually gathered through expert opinions, but the opinions need to be converted into numbers; the most frequent is through gathering estimates on the loss frequencies on predefined severity brackets
d. A key limitation of gathering expert opinions is that biases tend to arise (for example, presentation bias which is when the sequence of provided information skews the assessment; or availability bias which refers to the over/underestimation of loss events due to respondents’ familiarity with a risk) and biases are very difficult to mitigate or avoid
Answers here:
Questions:
602.1. Silverfind Financial International is planning to conduct a risk control self-assessment (RCSA) for each of its business units. Which of the following is MOST LIKELY to be a feature or element of the firm's RCSA?
a. Staff within a business unit are excluded from providing input into their own business unit's RCSA scorecard in order to avoid conflicts of interest
b. Any process with an inherent risk that is greater than its residual risk will be assigned a "red flag" because this is a situation that requires a process fix
c. Managers will first identify and assess inherent risks by making no inferences about controls embedded in the process; i.e., controls are assumed to be absent
d. In order to estimate realistic outcomes, risks are identified by assuming the mitigation impact of in-place controls; that is, the risk exposure sought is net of control and mitigation
602.2. Streethigh Bank is developing key risk indicators (KRI) for their Equity Settlement Process. The KRIs will be used as a proxy for the quality of the control environment and will directly inform the bank's OpRisk model. Assuming the bank it utilizing best practices in developing its KRIs, which of the following is mostly likely to be TRUE?
a. Collection of KRIs will be automated directly from the firm's operational systems at the cost center level
b. All of the bank's key risk indicators will be standardized on the same Red/Amber/Green (RAG) scale which can be quantified as 1/2/3
c. A majority of the bank's key risk indicators (KRIs) are qualitative; realistically, the few remaining quantitative KRIs are either measures with nominal or ordinal variables
d. Because the model concerns the banks own operational losses, external factors such as stock market volatility or interest rates will be excluded from the final quantitative model
602.3. According to Cruz, Peters and Shevchenko, scenario analysis is a key tool in operational risk measurement and "for a significant number of firms, the scenario analysis program is the pillar of their framework." (Source: Marcelo G. Cruz, Gareth W. Peters, and Pavel V. Shevchenko, Fundamental Aspects of Operational Risk and Insurance Analytics: A Handbook of Operational Risk (New York: John Wiley & Sons, 2015))
In regard to scenario analysis, each of the following is true EXCEPT which is not true?
a. Though there are different approaches to run a scenario workshop, three approaches are widely used: structured workshops, surveys, or individualized discussions
b. Scenario analysis is NOT effective for emerging risks due to a lack of actual loss experience and because there will likely exist a disparity of opinions among experts on loss sizes and frequencies
c. Scenarios estimates are usually gathered through expert opinions, but the opinions need to be converted into numbers; the most frequent is through gathering estimates on the loss frequencies on predefined severity brackets
d. A key limitation of gathering expert opinions is that biases tend to arise (for example, presentation bias which is when the sequence of provided information skews the assessment; or availability bias which refers to the over/underestimation of loss events due to respondents’ familiarity with a risk) and biases are very difficult to mitigate or avoid
Answers here:
