Chapter 2: Scenario Identification Process

Question 1

What is Scenario Analysis (SA) in Operational Risk Management?

Answer 1

A key component of the Advanced Measurement Approach (AMA) for calculating regulatory capital in operational risk management.

Focuses on high severity, low frequency events and involves both management and measurement.

Question 2

What are the steps in the Scenario Analysis process?

Answer 2

1. Preparation and Governance
2. Generation and Selection
3. Assessment
4. Validation
5. Incorporation into Management
6. Scenario Aggregation
7. Incorporation into Capital

Each step plays a critical role in effective risk management.

Question 3

What is included in the Preparation and Governance step?

Answer 3

Establishing a consistent approach, minimizing biases, and ensuring repeatable results.

Involves defining scope, objectives, and organizing meetings with relevant participants.

Question 4

Who are ideal participants in the Scenario Analysis process?

Answer 4

Senior managers with significant experience and understanding of operational risks, and external experts to mitigate biases.

Important to include individuals who can provide diverse perspectives.

Question 5

What common biases should be mitigated during Scenario Analysis?

Answer 5

1. Over-estimation of recent events
2. Focus on external scenarios

Most large losses are often due to internal causes.

Question 6

What are the key takeaways of Scenario Analysis?

Answer 6

1. Integral to regulatory compliance
2. Requires a structured approach
3. Understanding and mitigating biases is essential

Effective risk management relies on thorough documentation and expert input.

Question 7

What rules should be followed during scenario generation?

Answer 7

1. Focus on Quantity
2. No Criticism
3. Welcome Unusual Ideas
4. Combine and Improve Ideas

These rules foster an open and creative environment.

Question 8

What is the role of facilitators in the Scenario Analysis process?

Answer 8

Guide discussions, coordinate debates, and help achieve consensus.

Facilitators typically initiate meetings with warm-up questions to stimulate engagement.

Question 9

What are the recommended dynamics for Scenario Analysis meetings?

Answer 9

1. Ensure all participants contribute
2. Limit meetings to three hours
3. Schedule in the morning or late afternoon

These practices help maintain focus and creativity.

Question 10

What is the significance of the case study involving a FTSE 100 Insurance Company?

Answer 10

Sought regulatory approval for its internal modelling approach by identifying scenarios through brainstorming workshops.

Ensured equal contribution and prevented dominance by outspoken individuals.

Question 11

What are the methods of scenario selection in Scenario Analysis?

Answer 11

1. Consolidation
2. Exclusion
3. Tail Risks
4. Expert Involvement

These methods refine the list to focus on significant scenarios.

Question 12

What considerations are important during scenario selection?

Answer 12

1. Some scenarios may relate to already materialized risks
2. Compare generated scenarios with industry lists
3. Avoid relying solely on benchmark lists

A comprehensive approach considers both internal and external evidence.

Question 13

Fill in the blank: Scenario generation involves ________ to identify a broad range of potential risks.

Answer 13

[creative brainstorming]

Facilitated by ORM professionals.

Question 14

True or False: Scenario Analysis is only relevant for internal documentation.

Answer 14

False

It is integral to both regulatory compliance and effective risk management.