Module: | MODULE B: RISK MANAGEMENT
Q414: Consider the following statements regarding the Loss Data Collection (LDC) framework in Operational Risk Management:
1. LDC is a historical database that captures actual operational loss events experienced by the bank.
2. Banks are required to establish a minimum monetary threshold limit for recording internal operational loss events in the database.
3. External loss data, which includes losses suffered by other peer banks, is completely irrelevant and explicitly excluded from a bank's internal LDC framework.
Which of the statements given above is/are correct?
2. Banks are required to establish a minimum monetary threshold limit for recording internal operational loss events in the database.
3. External loss data, which includes losses suffered by other peer banks, is completely irrelevant and explicitly excluded from a bank's internal LDC framework.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: Loss Data Collection (LDC) is a fundamental pillar of operational risk measurement.
It involves building a comprehensive historical database of actual financial losses resulting from operational failures within the bank.
Statement 2 is correct: To prevent the database from being overwhelmed by immaterial, high-frequency micro-losses (like a ₹10 cash shortage at a teller), banks must establish a formal minimum monetary threshold limit.
Only loss events exceeding this threshold are systematically recorded in the LDC.
Statement 3 is incorrect: External loss data is highly relevant and required under advanced risk frameworks.
Analyzing massive operational losses suffered by peer banks (e.g., a massive cyber-heist at a competitor) allows a bank to identify vulnerabilities and adjust its scenario analysis models for low-frequency, high-severity events that it hasn't personally experienced yet.
Therefore:
Option A is correct as both Statement 1 and 2 are true.
Option B is incorrect because Statement 3 is false.
Option C is incorrect because Statement 3 is false.
Option D is incorrect because Statement 3 is false.
It involves building a comprehensive historical database of actual financial losses resulting from operational failures within the bank.
Statement 2 is correct: To prevent the database from being overwhelmed by immaterial, high-frequency micro-losses (like a ₹10 cash shortage at a teller), banks must establish a formal minimum monetary threshold limit.
Only loss events exceeding this threshold are systematically recorded in the LDC.
Statement 3 is incorrect: External loss data is highly relevant and required under advanced risk frameworks.
Analyzing massive operational losses suffered by peer banks (e.g., a massive cyber-heist at a competitor) allows a bank to identify vulnerabilities and adjust its scenario analysis models for low-frequency, high-severity events that it hasn't personally experienced yet.
Therefore:
Option A is correct as both Statement 1 and 2 are true.
Option B is incorrect because Statement 3 is false.
Option C is incorrect because Statement 3 is false.
Option D is incorrect because Statement 3 is false.