CORES Loss Data Collection & Analysis 5

Question 1

A firm recovers a portion of an operational loss through legal action three years after the original event. How should this recovery be treated in capital modeling?

Accepted Answer

Record as a recovery against the original event, reducing net loss but preserving gross loss history

Answer

Recoveries should be recorded against the original loss event to maintain accurate net loss figures while preserving gross loss data for frequency/severity analysis.

Question 2

What is the primary challenge of using Extreme Value Theory (EVT) to model operational risk loss severity?

Accepted Answer

EVT requires a sufficiently large sample of tail observations that may not exist in internal data

Answer

EVT's accuracy depends on having enough extreme observations to fit a reliable tail distribution, which is difficult given the rarity of catastrophic operational losses.

Question 3

In the context of loss data collection, what does 'gross loss' specifically exclude?

Accepted Answer

Insurance recoveries and proceeds from litigation settlements

Answer

Gross loss is the total financial impact before subtracting any insurance recoveries, indemnifications, or other compensations received.

Question 4

Which control is MOST effective at preventing loss events from being misclassified into the wrong Basel II Level 1 event type?

Accepted Answer

Mandatory second-line-of-defense review of event type assignments

Answer

Independent second-line review ensures business line self-reporting does not introduce systematic classification bias driven by incentives or misunderstanding.

Question 5

A financial institution's operational loss database shows a high frequency of low-severity losses but very few high-severity losses. Which statistical distribution property does this most likely indicate?

Accepted Answer

Heavy-tailed (leptokurtic) severity distribution

Answer

Operational risk severity distributions are typically heavy-tailed, meaning severe events are rarer but far larger than a normal distribution would predict.

(CORES) Certified Operational Risk Executive Specialist Practice Test

(CORES) Certified Operational Risk Executive Specialist Practice Test

CORES Loss Data Collection & Analysis 5