Module: | MODULE B: RISK MANAGEMENT
Q420: Scenario: A bank's risk management team is tasked with designing a scenario analysis framework to evaluate the bank's vulnerability to simultaneous cyber-attacks and regional power grid failures. Based on operational risk guidelines, consider the following statements regarding the correct construction of this scenario analysis:
1. The scenario must be based exclusively on historical loss data events that the specific bank has already experienced in the past.
2. The scenario analysis must evaluate extreme but plausible events to estimate the potential frequency and severity of future operational losses.
3. Constructing these scenarios requires heavy reliance on qualitative expert judgment from experienced business line managers.
Which of the statements given above is/are correct?
2. The scenario analysis must evaluate extreme but plausible events to estimate the potential frequency and severity of future operational losses.
3. Constructing these scenarios requires heavy reliance on qualitative expert judgment from experienced business line managers.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is incorrect: A core tenet of Scenario Analysis is that it must look beyond the bank's own internal loss history.
Confining the analysis exclusively to events the bank has already experienced completely defeats its forward-looking purpose.
It must incorporate external events, hypothetical situations, and emerging threats (like zero-day cyber attacks) that have not yet occurred internally.
Statement 2 is correct: The explicit definition of operational risk scenario analysis is the structured evaluation of "extreme but plausible" events.
The objective is to evaluate potential vulnerabilities and estimate the frequency and severity distribution of low-frequency, high-severity future losses.
Statement 3 is correct: Because these are hypothetical, extreme events often lacking deep statistical data, constructing and evaluating these scenarios relies heavily on qualitative expert judgment.
Experienced business line managers, IT heads, and risk professionals must brainstorm and estimate the systemic impacts.
Therefore:
Option A is incorrect because Statement 1 is false.
Option B is correct as both Statement 2 and 3 are true.
Option C is incorrect because Statement 1 is false.
Option D is incorrect because Statement 1 is false.
Confining the analysis exclusively to events the bank has already experienced completely defeats its forward-looking purpose.
It must incorporate external events, hypothetical situations, and emerging threats (like zero-day cyber attacks) that have not yet occurred internally.
Statement 2 is correct: The explicit definition of operational risk scenario analysis is the structured evaluation of "extreme but plausible" events.
The objective is to evaluate potential vulnerabilities and estimate the frequency and severity distribution of low-frequency, high-severity future losses.
Statement 3 is correct: Because these are hypothetical, extreme events often lacking deep statistical data, constructing and evaluating these scenarios relies heavily on qualitative expert judgment.
Experienced business line managers, IT heads, and risk professionals must brainstorm and estimate the systemic impacts.
Therefore:
Option A is incorrect because Statement 1 is false.
Option B is correct as both Statement 2 and 3 are true.
Option C is incorrect because Statement 1 is false.
Option D is incorrect because Statement 1 is false.