VRM 7. Operational Risk: LOs

a) Describe the different categories of operational risk and explain how each type of risk can arise.

b) Compare the basic indicator approach, the standardized approach, and the advanced measurement approach for calculating operational risk regulatory capital.

c) Describe the standardized measurement approach and explain the reasons for its introduction by the Basel Committee.

d) Explain how a loss distribution is derived from an appropriate loss frequency distribution and loss severity distribution using Monte Carlo simulation.

e) Describe the common data issues that can introduce inaccuracies and biases in the estimation of loss frequency and severity distributions.

f) Describe how to use scenario analysis in instances when data are scarce.

g) Describe how to identify causal relationships and how to use Risk and Control Self-assessment (RCSA), Key Risk Indicators (KRIs), and education to measure and manage operational risks.

h) Describe the allocation of operational risk capital to business units.

i) Explain how to use the power law to measure operational risk.

j) Explain how the moral hazard and adverse selection problems faced by insurance companies relate to insurance against operational risk.

VRM 8. Stress Testing: LOs

a) Describe the rationale for the use of stress testing as a risk management tool.

b) Explain key considerations and challenges related to stress testing, including choice of scenarios, regulatory specifications, model building, and reverse stress testing.

c) Describe the relationship between stress testing and other risk measures, particularly in enterprise-wide stress testing.

d) Describe stressed VaR and stressed ES and compare the process of determining stressed VaR and ES to that of traditional VaR and ES.

e) Identify the advantages and disadvantages of stressed risk metrics.

f) Describe the responsibilities of the board of directors, senior management, and the internal audit function in stress testing governance

g) Identify elements of clear and comprehensive policies, procedures, and documentations for stress testing.

h) Identify areas of validation and independent review for stress tests that require attention from a governance perspective.

i) Describe the Basel stress testing principles for banks regarding the implementation of stress testing.