medium · FRM Part 2 Operational Risk
An institutional desk head argues that a specific manual reconciliation control is 95% effective because it has never failed to detect a break in three years. However, internal audit notes the control's design requires a 'maker-checker' sign-off that is frequently bypassed during high-volume periods.
According to best practices in RCSA mechanics, how should the second-line risk function rate the 'Control Effectiveness' and the resulting 'Residual Risk'?
- Rate effectiveness as high based on the historical zero-loss record; Residual risk is minimal.
- Rate effectiveness as medium; use the historical 3-year performance to offset the design flaw.
- Rate effectiveness as low due to failed operating effectiveness; Residual risk remains near inherent levels.
- Rate effectiveness as high for 'Design' but low for 'Execution', averaging them to a 'Moderate' residual score.
Sign up free to see the explanation and track your rank →
More FRM Part 2 Operational Risk practice
- Which of the following describes the 'One Big Loss' principle for heavy-tailed (subexponen
- In the Bow-Tie analysis framework, where do 'Preventive Controls' sit relative to the oper
- A customer consistently deposits $9,800 in cash at three dif… — This behavior is a classic
- The Standardized Measurement Approach (SMA) formula is composed of two primary factors: th
- What is the regulatory treatment for 'Boundary Events' regarding capital requirements unde
- In the Standardized Measurement Approach (SMA), the Business Indicator (BI) serves as a pr
- Under a proper governance framework, 'Model Limitations' must be:
- If the bank had a poor loss history (LC > BIC), what is the impact on its capital?