medium · FRM Part 2 Operational Risk
A bank's Risk and Control Self-Assessment (RCSA) identifies a 'High' inherent risk for a vendor process, but the 'Residual' risk is marked 'Low' based on a 90% control effectiveness score.
If the bank has never audited the vendor's actual performance, the RCSA is likely suffering from:
- A violation of the subadditivity property of coherent risk measures like ES.
- A 'Type 1' error appearing in the Kupiec proportion-of-failures backtest.
- Self-assessment optimism bias and a failure of 'operating effectiveness' testing.
- Model drift in the 'Population Stability Index' (PSI) used for monitoring ML models.
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