CORES Scenario Analysis & Stress Testing 5

Question 1

A risk team is evaluating a scenario involving simultaneous failure of two critical third-party vendors. Which operational risk event type under Basel II taxonomy is MOST relevant?

Accepted Answer

Business disruption and system failures

Answer

Third-party vendor failure that disrupts operations falls under the Basel II event type 'Business Disruption and System Failures.'

Question 2

Which of the following BEST describes 'scenario conditioning' in stress testing?

Accepted Answer

Linking individual risk factor shocks so that they move consistently within a coherent macroeconomic narrative

Answer

Scenario conditioning ensures that correlated risk factors (e.g., GDP, unemployment, credit spreads) move together in a logically consistent manner across the scenario.

Question 3

A firm's climate risk stress test projects significant stranded asset losses by 2035. What makes this scenario categorically different from typical one-year operational risk scenarios?

Accepted Answer

Climate scenarios require multi-decade time horizons over which business models and regulations may transform

Answer

Climate risk requires long time horizons because physical and transition risks materialize over decades, unlike traditional short-horizon stress tests.

Question 4

When calculating stressed operational risk capital using scenario analysis, what role does expert judgment play in the LDA framework?

Accepted Answer

Expert judgment supplements sparse historical data to inform severity and frequency estimates for rare events

Answer

Because catastrophic operational risk events are rare, expert judgment is essential for estimating scenario parameters where historical data is insufficient.

Question 5

A bank executes a liquidity stress test showing it cannot survive a 30-day severe market disruption. Under Basel III's LCR framework, what is this bank's MOST immediate regulatory obligation?

Accepted Answer

Notify the regulator and submit a remediation plan, as LCR must be maintained at 100% or above

Answer

Banks failing to meet the 100% LCR minimum must notify their regulator and provide a remediation plan as required under Basel III liquidity standards.

(CORES) Certified Operational Risk Executive Specialist Practice Test

(CORES) Certified Operational Risk Executive Specialist Practice Test

CORES Scenario Analysis & Stress Testing 5