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Internal loss data (ILD) consists of what kind of data?
Definition of Internal Loss Data (ILD)
Internal Loss Data (ILD) refers to historical records of actual operational losses incurred by a bank.
These losses are used for risk assessment, capital calculations, and trend analysis under Basel III's Operational Risk Framework.
Key Characteristics of ILD
Captures actual past loss events, such as fraud, system failures, and compliance breaches.
Supports the identification of risk trends and weak control areas.
Used for operational risk capital modeling, along with external loss data and scenario analysis.
Why Other Answers Are Incorrect
Option
Explanation
A . It consists of near miss operational loss incidents of a bank.
Incorrect -- ILD captures actual losses, while near misses are reported separately.
C . It consists of the Key Risk Indicators of a bank.
Incorrect -- KRIs are forward-looking risk metrics, while ILD focuses on historical data.
D . It consists of scenario data developed to calculate the future operational loss incidents of a bank.
Incorrect -- ILD is historical, whereas scenario data is used for predictive analysis.
PRMIA Reference for Verification
Basel III & PRMIA Operational Risk Data Framework
PRMIA Risk Management Standards for ILD
What are some of the deficiencies associated with bottom-up Key Risk Indicators?
Definition of Bottom-Up Key Risk Indicators (KRIs)
Bottom-up KRIs are generated from operational-level data rather than high-level strategic indicators.
They are useful for monitoring localized risks but may fail to capture broad risk drivers.
Key Deficiencies of Bottom-Up KRIs
Lack of clarity on causal relationships -- These indicators may detect risk trends but fail to explain root causes.
Focus on micro-level risks -- They may miss systemic or enterprise-wide risk interactions.
Why Answer B is Correct
Bottom-up KRIs may indicate changes in risk levels but lack insight into the underlying causes, leading to reactive rather than proactive risk management.
Why Other Answers Are Incorrect
Option
Explanation
A . Mandates from a board that are too restrictive to implement.
Incorrect -- Board mandates apply to top-down governance, not bottom-up KRIs.
C . Not reported frequently enough.
Incorrect -- Reporting frequency is an issue but not the primary deficiency; rather, it's the lack of causal insight.
D . Lack of granularity.
Incorrect -- Bottom-up KRIs tend to be highly detailed (granular), making this answer incorrect.
PRMIA Reference for Verification
PRMIA Key Risk Indicator Best Practices
Basel Committee's Risk Measurement and Reporting Framework
For the National Australia Bank - FX Options case study, which was the major cause of the loss event?
Overview of the National Australia Bank (NAB) FX Options Case Study
Traders at National Australia Bank (NAB) engaged in unauthorized foreign exchange (FX) options trading.
They smoothed profits and concealed losses using fictitious transactions and manipulated reporting.
This led to a major financial scandal and loss of investor confidence.
Key Findings of the Investigation
Traders artificially smoothed profits to avoid drawing attention to large fluctuations.
Losses were concealed from internal risk controls by manipulating trade records.
The bank's risk management and governance controls failed to detect and prevent these activities.
Why Other Answers Are Incorrect
Option
Explanation
A . Currency traders were allowed access to the risk system by the CEO.
Incorrect -- No evidence suggests CEO involvement in granting system access.
B . Currency traders concealed losses using back-office knowledge.
Incorrect -- While they concealed losses, they also smoothed profits to manipulate earnings trends.
D . Currency traders were able to complete a Management Buy Out (MBO).
Incorrect -- This event was not related to a Management Buyout (MBO); it was a trading scandal.
PRMIA Reference for Verification
PRMIA Fraud and Risk Management Case Studies
Basel Principles on Market Risk and Internal Control Failures
For the TSB case what was the cause of the outage at the heart of the case?
Step 1: Understanding the TSB Case
The TSB outage in 2018 was caused by a failed IT migration from its old banking system to a new one.
The transition locked millions of customers out of their accounts for weeks, resulting in financial losses and reputational damage.
Step 2: Why Option C Is Correct
TSB attempted to move customer data to a new banking platform, but serious defects in the migration process led to service failures.
PRMIA and UK Financial Conduct Authority (FCA) reports confirmed that poor IT risk management was a key failure.
Step 3: Why the Other Options Are Incorrect
Option A ('Liquidity squeeze by hedge-fund')
Incorrect because TSB's failure was due to IT migration issues, not a liquidity crisis.
Option B ('Sub-standard risk pricing and risk management')
Incorrect because pricing models were not the cause---it was an IT system failure.
Option D ('IT models did not work if prices were discontinuous')
Incorrect as this issue is more common in high-frequency trading failures, not banking system outages.
PRMIA Risk Reference Used:
UK FCA Investigation on TSB Incident -- Confirms IT migration failure as root cause.
PRMIA IT Risk Management Framework -- Highlights risks of major IT transitions.
Final Conclusion:
The TSB outage was caused by a failed IT migration, making Option C the correct answer.
