Operational risk

Question 1

Near misses

Answer 1

occurrences that might have led to a loss but did not as a result of good fortune or action outside an organization’s control

Question 2

Risk Wheel

Answer 2

Brainstorming tools in risk identification. Shows domino effect

Question 3

Horizon scanning

Answer 3

Tools To spot new risk. Like PESTEL.

Question 4

RCSA

Answer 4

The process through which an organization or business line assesses the possibility and impact of its operational risks. RCSAs result in a self-evaluation of a business unit’s primary inherent risks, the key controls reducing those risks, and the effectiveness of those controls

Question 5

Process mapping

Answer 5

Process -> step -> controls -> identify the risks mitigating -> what might go wrong

Question 6

Taxonomies

Answer 6

structured manner of expressing causes, risks, impacts, and controls in progressively more detailed ways

Question 7

Boundary events

Answer 7

Occurrences that arise in a different risk category compared to their cause

Question 8

Impact scale (RCSA)

Answer 8

The four most common scales used to measure impact are financial, regulatory, customer, and reputation impacts

Increase in the consideration of the continuity of services as a scale due to the regulatory attention

Question 9

Fault Tree Analysis (FTA)

Answer 9

Analysis used to identify the root causes and potential consequences of operational risks. It is a top-down approach, examines the different ways an event or failure can occur, allowing organizations to visualize the sequence of events that lead to an incident.

Question 10

Fault tree diagram

Answer 10

Graphical representation used to depict all of the possible failures that could contribute to an event (FTA)

Question 11

Extreme Value Theory (EVT)

Answer 11

statistical method of analyzing extreme events in data sets

Question 12

Block Maxima

Answer 12

examines the behavior of maxima values which are equally spaced in time (e.g., maximum operational loss per period of time and per unit of measure).
This allows for the identification and analysis of maxima patterns that occur over time and their severity level for determining potential risk levels

Question 13

Peak-over-threshold

Answer 13

works by focusing on observations that lie above a certain high threshold set to be sufficiently large

Question 15

RPO - Recovery Point Objectives

Answer 15

How much data lost / to be recovered after outage. Data bakup frequency determine RPOs

Question 16

RTO - Recovery Time Objectives

Answer 16

How much downtime a business can tolerate

Question 17

Types of stress testing

Answer 17

3 types: parameter, macroeconomic, reverse stress test

Question 18

Parameter/Model Stress Testing

Answer 18

A model parameter is stressed to see how a model, bank, or portfolio fares under stressed conditions.

Question 19

Macroeconomic Stress Testing

Answer 19

its focus is on how changes in macroeconomic factors affect their output.

Question 20

Reverse Stress Testing

Question 21

12 fundamental principles of operational risk management (ORM)

Answer 21

1. Culture directed by the board of directors (board) and put in place by senior
   management
2. Maintaining a robust operational risk management framework (ORMF)
3. Board analysis and validation of the ORMF
4. Board to regularly assess and sign off on operational risk appetite and operational
   risk tolerance statements
5. Clear description of senior management’s responsibilities regarding ORM policies
   and systems development and implementation
6. Thorough description and evaluation of operational risk for key business activities
7. Thorough preparation and communication of the change management process
8. Ongoing review of operational risk proϐile and exposures9. Secure and stable controls (e.g., internal controls, risk mitigation, training, risk
   transfer methods)
9. Reliable information and communication technology (ICT) that is consistent with
   the ORMF
10. Established business continuity plans that are consistent with the ORMF
11. External disclosures on the ORM approach and risk exposures

Question 22

Myopia

Answer 22

Placing too much more importance on recent events than the past

Question 23

TPRM life cycle

Answer 23

5 stages:
1) Business model decision
2) Evaluation, risk rating, due diligence
3) RFPs (requests for proposal) and contracts
4) Monitoring (continuous and ongoing)
5) Remediation or termination

Question 24

CCAR effectiveness principles

Answer 24

1) sound foundational risk management
2) effective loss-estimation methodologies
3) solid resource-estimation methodologies
4) sufficient capital adequacy impact assessment
5) capital planning & policy
6) robust internal controls
7) effective governance

Question 25

According to the regulations set forth by the Federal Reserve's Capital Plan Rule, what is the specified duration for which should these financial estimates be made?

Answer 25

9 quarters

Question 26

Model review and validation includes

Answer 26

1. Testing conceptual soundness 2. On going monitoring and benchmark 3. Outcome analysis

Question 27

feeder models

Answer 27

Models used to produce projections or estimates to be used in another model to generate final figures for expected losses, expenses and revenue.

Question 28

Three pillars of the Basel II framework

Answer 28

Minimum Capital Requirement, Supervisory Review, Market Discipline