Chapter 2 - Scenario Identification Process

Question 1

How many pillars are there for the advanced measurement approach (AMA) for operational risk to calculate regulatory capital

Answer 1

4

Question 2

what is Scenario analysis (SA) a pillar of

Answer 2

AMA, good risk management, internal capital assessment

Question 3

what is sa focussed on

Answer 3

extremes - not limited to financial impact

Question 3

how is Scenario analysis accurately defined

Answer 3

the assessment and management of the exposure to high severity, low frequency events on the firm

Question 4

7 steps of scenario analysis PGAVISI

Answer 4

1. Preparation and governance.
2. Generation and selection.
3. Assessment.
4. Validation.
5. Incorporation into management.
6. Scenario aggregation.
7. Incorporation into capital.

Question 5

main challenge in scenario analysis

Answer 5

consistency of approach and
the mitigation of behavioral biases

Question 6

a strong regulatory requirement of
scenario analysis

Answer 6

should lead to repeatable results, both quantitative and qualitative.

Question 7

what does the regulator demand that firms do when conducting scenario identification and assessment

Answer 7

minimize subjectivity and biases - use empirical evidence, explain the rationale behind scenarios, assumptions must be documented

Question 8

SA preparation and planning is normally the role of which function

Answer 8

risk function - unless the
business has taken full control of the SA process

Question 9

The general documentation of
the organization and methodology is usually the role of which function

Answer 9

risk function

Question 10

what does the SA preparation phase include?

Answer 10

defining the scope and objectives of the exercise, identifying the relevant participants, organizing meetings and setting schedules.

Question 11

who are the participants in the preparation phase

Answer 11

business managers (more senior = better)
risk owners (HR, IT, Compliance, .)

Question 12

what are Representatives of the risk functions part of the preperartion phase for

Answer 12

To facilitate meetings and to document the process and the content of the
meetings

Question 13

what is commonly done with preperation pack

Answer 13

distribute documents before the first meetings (and they are not always read anyway)

Question 14

what is a “preparation pack”

Answer 14

documents that help later selection and assessment of scenarios.

Question 15

why may you choose to preperation pack from the participants during the generation phase

Answer 15

to keep the brainstorming sessions as free from influence and as creative as
possible.

Question 16

what do Preparation documents
include

Answer 16

■External loss data
■ Internal loss data
■ RCSA results
■ Key risk indicator scores
■ Audit issues
■ Concentrated exposures,
■ relevant documents for risk and exposure assessment

Question 17

who should be the participants in SA workshops and brainstorming sessions

Answer 17

senior managers within the different corporate function - significant risk experience knowledgable about operational risks and be open-minded thinkers

Question 18

myopia

Answer 18

the over-estimation of recent events

Question 19

what are most large losses experienced by the financial industry due to

Answer 19

internal causes, such as rogue trading, LIBOR rigging, mis-selling, embargo breaches, data losses and internal fraud.

Question 20

what do the 4 rules of brainstorming aim to achieve

Answer 20

group creativity and reduce social pressures

Question 21

what are the 4 rules of brainstorming

Answer 21

1. Focus on quantity first
2. No criticism
3. Unusual ideas are welcome
4. Combine and improve ideas

Question 22

SA workgroup facilitators are what type of proffesional

Answer 22

ORM professionals

Question 23

what is the role of SA workgroup facilitators

Answer 23

initiate discussions at each step of the process, coordinate debates and reach the best consensus based on the input of every member

Question 24

The initial output of sa group task should contain at least how many scenarios

Answer 24

20-30 scenarios

Question 25

drawback of risk identification

Answer 25

findings are strongly biased by what happened in the past -

Question 26

benefits of screening any new elements in a business

Answer 26

more revealing and rigorous scenarios that embrace changes to products, technology, business processes, management , lines of business, third parties and software.

Question 27

A comprehensive picture of risks is more likely if ..

Answer 27

everyone in the group has a chance to speak

Question 28

how long should scenario analysis meetings last

Answer 28

no more than three hours on the same day, productivity/creativity decline the longer the meeting

Question 29

how to maintain focus in scenario analysis meetings

Answer 29

phones should be switched off and other external distractions avoided

Question 30

what time should scenario analysis meetings be organised

Answer 30

morning, when people are fresh, or second part of afternoon, attention is low immediately after lunch.

Question 31

A common flaw in many immature organizations

Answer 31

analyzing just one scenario for each risk type, often simply matching the seven risk categories identified by Basel II

Question 32

Scenario selection

Answer 32

intermediary phase where some scenarios are consolidated and others eliminated or added, to obtain a list relevant enough to be fully assessed

Question 33

when can Tail risks scenarios be eliminated

Answer 33

if risk owner can convincingly demonstrate that the maximum loss is moderate enough to be absorbed by normal operating margin

Question 34

examples of industry bodies that provide ready-made scenario lists to their members

Answer 34

Operational Risk Consortium (ORIC) Operational Riskdata eXchange Association (ORX)

Question 35

when to use ready made scenario lists

Answer 35

after scenario generation meeting, so it won’t influence or bias the generation process