Chapter 7 Key Learning Questions

Question 1

1. How does a near miss event differ from a loss

Answer 1

A near miss is an event that did not result in a loss because of fortuitous circumstances, but analysis is required to understand why intermediate controls did not operate properly. (Section 7.1.3)

Question 2

2. In what situation could a risk event result in a gain?

Answer 2

A risk event on a trading floor, such as a ‘fat finger’ error when buying/selling, could result in a gain or a loss depending on market movements between the time of error and its discovery/reversal. (Section 7.1.4)

Question 3

3. What is the difference between direct and indirect losses?

Answer 3

Direct losses have a direct financial impact while indirect losses are ancillary impacts that may be difficult to quantify, such as reputational damage. (Section 7.1.1)

Question 4

4. What key information should a firm record in relation to risk events?

Answer 4

A firm should record the event description/type, amount, dates, recoveries, business entity, business activity, geographic location, and event description. (Section 7.2)

Question 5

5. Why is it important to undertake root cause analysis of risk events?

Answer 5

To understand if controls failed or were lacking, assess risk exposure, and take action to prevent reoccurrence or mitigate risks. (Section 7.3)

Question 6

6. What should a firm consider when setting a risk event data collection threshold?

Answer 6

The size of the firm, cost/benefit trade off, materiality of small losses indicating control failures, culture, and impact on modelling quality. (Section 7.4)

Question 7

7. How can risk event data be used to validate RCSAs?

Answer 7

By challenging control assessments and impact/likelihood scoring using actual loss event data. (Section 7.6.1)

Question 8

8. What else can risk event data be used for?

Answer 8

Scenario analysis, risk indicators, modelling, accounting, risk appetite, action plans, training, external reporting. (Section 7.6)

Question 9

9. Who should be responsible for reporting a risk event?

Answer 9

There are several options - the detector, originating department, operational risk specialist, anonymous reporter. (Section 7.5.3)

Question 10

10. What is external loss event data and where can this be obtained?

Answer 10

Data about large losses experienced by other firms, obtained from media, consortium databases, and data sharing groups. (Sections 7.7.1, 7.7.2)

Question 11

11. Why would a firm consider obtaining external loss event data?

Answer 11

For scenario analysis, benchmarking, risk identification, new product analysis, setting risk appetite, risk education. (Section 7.8)