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Answer: Participants consolidated two scenarios in which different external events caused the same impact on the bank's infrastructure into a single scenario.
**Correct Answer: C** **Explanation:** C is correct because consolidating scenarios involving the same internal impact but different external causes is a reasonable practice in the scenario selection phase. When different external events cause the same effect on the firm's infrastructure, they can be assessed as a single operational loss scenario. This approach helps make the number of scenarios more manageable and efficient. **Why other options are incorrect:** - **A is incorrect:** Using industry scenarios procured externally should only occur after the bank has generated its scenarios internally. Introducing external scenarios first can bias the scenario generation process and limit creative thinking about firm-specific risks. - **B is incorrect:** This introduces a bias known as myopia - the overestimation of the probability of severe events that have happened recently. Recent events should not disproportionately influence future probability assessments. - **D is incorrect:** A significant proportion of losses experienced by financial firms are due to internal events. While firms often emphasize external events, internal causes should be evaluated as well since they represent substantial operational risk exposure. **Best Practice:** The consolidation approach in option C aligns with operational risk management best practices by focusing on the actual impact on the firm rather than the specific external trigger, making the scenario analysis more efficient and comprehensive.
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A large global bank recently held an internal workshop to develop a set of scenarios involving extreme operational risk events. An internal auditor at the bank reviews the process used to develop scenarios at the workshop as well as some conclusions drawn by the workshop participants. Which of the following would the auditor find to be most reasonable and aligned with best practices?
A
Participants began the workshop by reviewing a set of scenarios provided by an external industry source and used these as a guide to generate the scenarios discussed in the workshop.
B
Participants assigned a high probability to the occurrence of a severe new pandemic in the future given that one had occurred in the previous year.
C
Participants consolidated two scenarios in which different external events caused the same impact on the bank's infrastructure into a single scenario.
D
Participants emphasized scenarios arising from external causes, such as geopolitical crises and cyber-attacks, as losses from internal causes were considered to be unlikely.