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Answer: The central operational risk function should be responsible for aggregating information from each of the business units about operational risk exposures.
C is correct. The central operational risk function should be responsible for collecting information about specific operational risk exposures from the business units and aggregating this information into a firm-wide risk report. A is incorrect. Reports to the board of directors should contain a less extensive set and concentrate on those metrics that provide an overview of the firm's key risk exposures and are necessary for decision-making. Business line managers and other first-line risk managers should monitor a much more extensive set of indicators to detect potential adverse trends across a wide variety of metrics that might require action or escalation. B is incorrect. The firm's executive committee should have this responsibility. D is incorrect. Reporting operational risks using a forward-looking perspective is often done, especially in firms with a more mature operational risk management function. However, risk reporting does not have to be exclusively forward looking and many firms still use a largely backward-looking approach. Examples of a valuable backward-looking approach is performing trend or volatility analysis on the firm's operational losses in different categories over time.
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The CRO of a regional mortgage lender has asked an enterprise risk manager to develop a set of policies and procedures for the firm's operational risk reporting. The manager considers appropriate policies for the governance of the firm's risk reporting framework and also assesses how the firm should structure its risk reports for different stakeholder groups and organizational functions. Which of the following would be most appropriate for the manager to recommend?
A
The firm should report a more detailed and extensive set of key risk indicators to the board of directors than it does to business line managers to support the board's strategic risk review.
B
The operational risk committee should be responsible for executing all necessary changes to the firm's risk exposures after risk reports are reviewed.
C
The central operational risk function should be responsible for aggregating information from each of the business units about operational risk exposures.
D
The firm should emphasize forward-looking risk indicators and avoid the use of backward-looking indicators in its risk reporting.