Chapter 2: Scenario Identification Process

Question 1

What is Scenario Analysis (SA) one of the four pillars of?

Answer 1

AMA - Advanced Measurement Approach
Used to calculate regulatory capital

Question 2

What is scenario analysis defined as?

Answer 2

The assessment and management of the exposure to high severity, low frequency events on the firm

Question 3

What are the 7 steps of Scenario Analysis?

Answer 3

1. Preparation and governance.
2. Generation and selection.
3. Assessment.
4. Validation.
5. Incorporation into management.
6. Scenario aggregation.
7. Incorporation into capital.

Question 4

What happens in SA Preparation?

Answer 4

Big challenge is objectivity in scenario analysis
Preparation involves defining scope and objectives and schedules
Documents - loss data, peer loss data, RA results, audit results

Question 5

who attends SA prep meetings?

Answer 5

senior BMs, diff corp functions
open minded, knowledgeable about operational risk

Question 6

What are most large losses in the financial system caused by?

Answer 6

Internal issues (leverage, rouge traders), not external (attacks, market losses)

Question 7

What is scenario selection?

Answer 7

Choosing/developing appropriate scenarios from the brainstorming

Question 8

What are the 4 rules of scenario generation?

Answer 8

1. Quantity first, get loads out
2. No criticism
3. Unusual ideas welcome
4. Combine and improve ideas
   open minded

Question 9

What would be a risk that has occurred but loss is uncertain?

Answer 9

Litigation

Question 10

What are 2 industry bodies that provide ready-made scenario lists to their members?

Answer 10

ORIC Operational Risk Consortium
(ORX) Operational Riskdata eXchange

Question 11

When should the ready made lists be provided?

Answer 11

AFTER, prevent bias