medium · FRM Part 2 Operational Risk
A business unit identifies 50 risks in its RCSA, all with 'Residual Scores' of 1 or 2 (Green). The total 'Expected Loss' (EL) for the unit is $5 m.
Why might a CRO still be concerned about the 'Aggregate' risk of this unit?
- The SMA capital formula will double the required capital for this unit no matter what the RCSA scores indicate.
- A $5 m Expected Loss figure is inherently too large for a business unit whose residual risks are all currently rated 'Green'.
- The unit is clearly 'under-reporting' its inherent risk exposure deliberately just to keep the residual scores looking green.
- RCSA often misses 'Interdependencies'; 50 small independent risks may be highly correlated in a systemic stress event.
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