Week 3 Flashcards
What is Scenario Assessment?
A method used to evaluate the impact of potential risk events on an organization by creating detailed scenarios to understand how different risk events could affect the business
What does Severity Assessment evaluate?
Total financial and non-financial impacts, both direct (e.g., money loss) and indirect (e.g., reputational damage)
What is the purpose of converting non-financial impacts to financial terms in Severity Assessment?
To provide a complete assessment by expressing all impacts in comparable financial terms
What is the time horizon used for Frequency Assessment in scenario analysis?
One-year horizon (next 12 months)
What are the key steps in Scenario Assessment?
Preparation and Governance, Scenario Generation and Selection, Scenario Assessment, Validation and Review, Incorporation into Management, Scenario Aggregation and Reporting
What is the Delphi Method in scenario assessment?
A technique for pooling expert judgments through silent collection of individual assessments, disclosure of estimates, optional reassessment, and final estimate calculation
What is Fault Tree Analysis (FTA)?
A technique that breaks down scenarios into conditions that must occur for a disaster, originally used in high-risk industries but now adopted in the financial sector
What is the formula used in the Delphi Method for calculating the final estimate?
Final estimate = (lowest response + (n − 2) × average response + highest response) ÷ number of participants (n)
What is the purpose of scenario documentation?
To record the entire scenario analysis process in detail, using standard templates to ensure consistency and help with comparison
How many scenarios might a large firm have after assessment and consolidation?
Around 50 scenarios
What is Availability Bias in risk assessment?
When recent events seem more likely than older ones
What is Anchoring Bias in risk assessment?
When initial information unduly influences judgments
What is the recommended approach to reduce estimation biases in structured expert analysis?
Use structured questions and benchmarks based on past experience and similar events
What is a recommended technique to mitigate group polarization bias?
Silent estimates where participants answer individually before discussing results
Why is a smaller group of subject matter experts often more effective than larger groups?
Large groups can add noise and increase bias
What is Regulatory Capital?
The minimum amount of capital that a financial institution must hold as required by financial regulators
What are the three pillars of the Basel II framework?
Minimum capital requirements, Supervisory review, Market discipline
What is the Basic Indicator Approach (BIA) for calculating regulatory capital?
Regulatory capital equals 15% (alpha factor) of gross income
What is the Standardized Approach (TSA) for calculating regulatory capital?
Capital is based on business lines and a beta factor of 12%, 15%, or 18%, depending on risk level
What are the four components required for the Qualifying Model in the Advanced Measurement Approach?
Internal loss data (ILD), External data (ED), Scenario data (SD), Business environment and internal control factors (BEICF)
What is the Loss Distribution Approach (LDA)?
A technique that breaks down risk events into frequency (how often they occur) and severity (their cost)
What distribution is most commonly used to model frequency in the Loss Distribution Approach?
Poisson distribution (used by 90% of AMA firms)
What distribution is most commonly used to model severity in the Loss Distribution Approach?
Lognormal distribution
What is the most common convolution method used in the Loss Distribution Approach?
Monte Carlo simulation
