FRM lec 10

Question 1

process aims to reduce the overall risk level to one that is acceptable to senior management and regulatory bodies

Answer 1

Operational Risk Management

Question 2

Consider all the services, processes, and procedures and identify the potential risks and controls in place relating to each service, process, or procedure.

Answer 2

Identification

Question 3

Consider each identified risk and assess the effectiveness of existing controls in mitigating the risk’s potential impact

Answer 3

Assessment

Question 4

Operational risk measurement involves quantifying the potential losses from each identified risk

Answer 4

Measurement

Question 5

Once operational risks have been identified, assessed, and measured, additional controls and process improvements can be developed and implemented to further mitigate identified risks to levels that are consistent with the risk level of the organization

Answer 5

Mitigation and control

Question 6

Requires ongoing monitoring of risks and concise, timely communication to management, employees, and regulators. Regular risk reports on operational risk events allow management to better understand and assess the operational risk profile of the institution and to allocate the resources effectively to guard against unexpected increases in risk events

Answer 6

Monitoring and reporting

Question 7

Is responsible for risk management across the entire firm

Answer 7

Centralized risk function

Question 8

Is responsible for evaluation of an individual business line

Answer 8

Business line risk function

Question 9

Is responsible for operational risk management for a business unit and supported by a central risk management group or function

Answer 9

Individual business unit risk function

Question 10

The focus is on the review of individual business processes by external auditors. This practice is usually used to supplement the bottom-up approach.

Answer 10

Audit oversight

Question 11

Each business unit analyzes the nature of the operational risks it faces. This subjective method leads to an inventory of various risks, including an evaluation of the frequency and severity of past losses. Often this approach would include the development of risk control processes, such as checklists and questionnaires. This is a bottom-up approach.

Answer 11

Critical self-assessment

Question 12

This relates process flows, organizational units, and business units to various operational risk types to help management understand the location of operational weaknesses. This is considered a bottom-up approach.

Answer 12

Risk mapping

Question 13

A map of the factors that directly or indirectly cause an operational risk event is created.

Answer 13

Causal networks

Question 14

These measure the change in risks over time, indicating how risky an activity is. Usually early warning signs (increased staff turnover, trade volumes, number of failed trades, the frequency and severity of errors within one business unit, etc.), potential losses can be estimated

Answer 14

Key risk indicators

Question 15

The focus is on the frequency and magnitude of operational risk losses and is based on internally collected or externally sourced information. Earnings volatility. The earnings of various operational units are analyzed, and the historical changes in the earnings are calculated.

Answer 15

Actuarial models.