Chapter 7 Learning Outcomes

Question 1

Understand the role of events and losses in the management of operational risk

Answer 1

Events and losses provide the evidence that operational risks have materialized. Analysis of loss events enables firms to identify control failures, assess risk exposure, take mitigating actions, and build models to quantify operational risk capital requirements. Though past events don’t necessarily predict future risk, they provide opportunities for learning and improvement. (Introduction, 7.1, 7.3)

Question 2

Differentiate between the types of events.

Answer 2

Direct events have a direct financial impact while indirect events have ancillary impacts that may be hard to quantify. Losses result in actual impacts, near misses are close calls without actual loss, and gains are upside results of operational failures. Events also include boundary risks like credit or market losses stemming from operational failures. (7.1.1, 7.1.3, 7.1.4, 7.1.5)

Question 3

Describe the attributes of event data and their use.

Answer 3

Key attributes are event type, amount, dates, recoveries, business entity, activity and location. These aid causal analysis, mapping to regulations, trend analysis, aggregation, and action planning. Granularity, taxonomy and consistency are vital. (7.2)

Question 4

Explain the importance of root cause analysis.

Answer 4

Enables firms to understand why events happened, whether controls failed, assess risk exposure, decide on mitigating actions, and continuously improve risk management. Root causes tie back to people, processes, systems, external events or firm’s internal environment. (7.3)

Question 5

Describe the role and implication of thresholds in relation to reporting event data.

Answer 5

Thresholds balance reporting costs with insights from immaterial losses reflecting control failures. Considerations include firm size, culture, modelling implications, materiality, and early warning signals. Escalation thresholds prompt root cause analysis. (7.4)

Question 6

Describe issues, roles and responsibilities in relation to reporting event data

Answer 6

Aims are completeness, accuracy and timeliness. Various roles can report events, with trade offs between timeliness, volume and quality. Anonymous reporting may be warranted. Attestations, audits, benchmarks help ensure completeness. (7.5)

Question 7

Explain the uses and limitations of internal event data.

Answer 7

Uses include informing RCSAs, scenarios, indicators, modeling, accounting, risk appetite, action plans, education. Limitations center around incomplete subjective data that may not predict future risk. (7.6)

Question 8

Describe the benefits and limitations of sources of external loss event data.

Answer 8

Sources include media, consortium databases, peer firms. Benefits are learnings for scenario analysis, benchmarking, identification and awareness. Limitations include biases, confidentiality, legal, definitional and standardization issues. (7.7)

Question 9

Explain the uses of external loss event data.

Answer 9

External data aids scenario building, benchmarking, risk ID, new product analysis, setting risk appetite and risk education by revealing risks not seen internally. Limitations require care in directly applying insights. (7.8)