Pass the PRMIA PRM Certification 8020 Questions and answers with ExamsMirror

Near Misses in Operational Risk

Anear missis an event that could have led to a loss but wasavoided or mitigatedbefore actual financial impact occurred.

PRMIA emphasizes that near misses should bereported, recorded, and analyzedbecause they provide valuable insights intopotential vulnerabilitiesin risk controls.

However, since they did not result in actual financial losses,they are not included in the calculation of Operational Risk Capital.

Opportunity Costs in Operational Risk

Opportunity costsrefer to theloss of potential gainsdue to missed strategic opportunities.

These arenot directly quantifiable as operational risk lossesand are not included in Operational Risk Capital calculations.

PRMIA’sOperational Risk Frameworkstates thatoperational risk is about actual lossesrather than theoretical costs.

Why Other Answers Are Incorrect

Option

Explanation

A. Ignored.

Incorrect– Near misses and opportunity costs provide valuable insights into operational risk, so they should never be ignored.

B. Recorded and Analyzed. Used in calculation of Operational Risk Capital.

Incorrect– While they should be recorded and analyzed, they arenot included in Operational Risk Capital calculationsbecause they do not result in actual losses.

D. Reported, Recorded, and Analyzed, Used in calculation of Operational Risk Capital.

Incorrect– Reporting, recording, and analysis are correct, but theyshould not be included in capital calculations.

PRMIA Operational Risk Management Standards– Defines near misses and opportunity costs.

Basel II & III Operational Risk Framework– Outlines the principles of operational risk capital calculations.

PRMIA References for Verification

ACritical Business Serviceis one whose failure could result insevere harm to customers, financial markets, or the firm’s viability.

Regulators (e.g.,Bank of England, Basel Committee, PRMIA) definethree primary factorsfor identifying critical services:

Customer impact

Market integrity impact

Firm viability impact

Risk appetite is an internal business decision, not an external measure of criticality.

A servicecan be critical even if its disruption stays within risk appetite.

Criticality is based on external impacts, not just internal risk limits.

Option A ("Material customer detriment")→Correctas customer harm defines critical services.

Option B ("Harm to market integrity")→Correctas market stability is a regulatory priority.

Option D ("Threaten firm viability")→Correctas critical services often determine business survival.

Step 1: Definition of a Critical Business Service in Operational ResilienceStep 2: Why Option C Is IncorrectStep 3: Why the Other Options Are Correct

PRMIA Operational Resilience Framework– Defines criteria for critical business services.

Basel Committee Operational Risk Guidelines– Highlights customer, market, and firm viability as resilience factors.

PRMIA Risk References Used:

Final Conclusion:Risk appetiteis an internal benchmark, not a measure ofcritical service designation, makingOption C the correct answer.

The Business Indicator (BI) is a financial-statement-based metricused inBasel III's Standardized Approach for Operational Risk.

It replacesprevious approachesby usingfinancial figures (e.g., revenue, fees, interest income)to estimate operational risk exposure.

The BI uses financial-statementdatato calculateoperational risk capital requirements.

It acts as aproxy for a bank’s operational risk exposureby linking operational risk to itsfinancial size and complexity.

Option A ("Proxy for near-miss events")→ Incorrect because BI is based onfinancial data, not near-miss risk events.

Option B ("Non-financial-statement-based proxy")→ Incorrect becauseBI is explicitly derived from financial statements.

Option C ("Scaling factor based on historical losses")→ Incorrect becauseBI does not use historical losses directly—it relies on financial-statement inputs.

Step 1: Definition of the Business Indicator (BI) in Basel IIIStep 2: Why Option D Is CorrectStep 3: Why the Other Options Are Incorrect

Basel III Operational Risk Framework– Defines the Business Indicator as a financial-statement-based metric.

PRMIA Operational Risk Guidelines– Explains the BI’s role in capital calculations.

PRMIA Risk References Used:

Northern Rock was a UK bank that collapsed in 2007due to its heavy reliance onshort-term wholesale fundingrather than customer deposits.

When the2007 financial crisishit, theinter-bank lending market and commercial paper market froze, cutting off Northern Rock’s access to liquidity.

Northern Rock depended onshort-term borrowing to fund long-term mortgage lending.

When theliquidity crisis hit, itcouldn’t refinance its debt, leading toa bank run and collapse.

TheBank of England had to intervene, and the UK governmentnationalized Northern Rock in 2008.

Option A ("Acquisition of Merrill Lynch")→ Incorrect becausethis happened in 2008, after Northern Rock’s failure.

Option B ("Withdrawal of Deposit Protection")→ Incorrect becauseUK deposit protection remained in place.

Option D ("Real estate exposure in Berlin")→ Incorrect because Northern Rock'sproblem was funding liquidity, not real estate losses.

Step 1: Understanding the Northern Rock Case StudyStep 2: Why Option C Is CorrectStep 3: Why the Other Options Are Incorrect

PRMIA Liquidity Risk Management Framework– Describes howliquidity shocks impact banks like Northern Rock.

Basel III Liquidity Coverage Ratio (LCR) Standards– Created after Northern Rock toprevent similar liquidity crises.

PRMIA Risk References Used:

Final Conclusion:Thecollapse of the inter-bank and commercial paper marketswas the keylow-probability-high-impact eventthat led to Northern Rock’s failure, makingOption C the correct answer.

Team supervisors play acritical rolein shaping and maintaining an organization'srisk culture. PRMIA'sRisk Governance FrameworkandRisk Culture Principlesemphasize that supervisors act asthe link between risk policies and frontline employees, ensuring that risk-aware behaviors are consistently followed.

Supervisorsengage with employees daily, providing guidance on risk-based decision-making.

Theyreinforce risk policies, standards, and expectationsset by senior management.

Supervisorsidentify behavioral trendsthat may indicate risk culture weaknesses.

PRMIA’sRisk Culture Frameworkstresses that risk culture must beembedded into daily operationsthrough supervisor-led enforcement.

Supervisors monitor,correct non-compliant behaviors, and provide ongoingrisk awareness training.

Their proximity to employees allows them todetect early warning signs of risk issues.

Option A:"More experienced than the employees that report to them."

Experience alonedoes not establish or maintaina risk culture.

A risk culture is aboutbehaviors and practices, not just expertise.

Option B:"Visible to regulators and can describe the firm's risk culture to inspection teams."

While supervisorsmayinteract with regulators, theirprimary roleis to engage with employeesdailyrather than acting as spokespersons.

Option D:"Visible to regulators and can describe the firm's risk culture to their board."

Boards typically rely on Chief Risk Officers (CROs)or senior executives to communicate risk culture, not direct supervisors.

Step 1: Role of Supervisors in Risk Culture DevelopmentStep 2: Supervisors as Enforcers of Risk CultureStep 3: Why the Other Options Are Incorrect

PRMIA Risk Culture Framework– Highlights the role of supervisors in ensuring risk-aware behaviors.

PRMIA Risk Governance Framework– Stresses that frontline supervisors must enforce risk management policies.

PRMIA Risk Awareness Guidelines– Reinforces daily interaction as a key factor in maintaining a strong risk culture.

PRMIA Risk References Used:

Final Conclusion:Supervisorsdirectly influence employees' behaviorsand ensure that risk culture is consistently followed, makingOption Cthe correct answer.

Definition of Control Rating Scales

Control rating scalesmeasure the effectiveness and performance of risk management controls.

They help organizationsevaluate control strength and identify weaknesses.

Key Components

Control effectiveness→ Measureshow well the control mitigates risks.

Control performance→ Assesseswhether the control operates as designed in practice.

Why Answer C is Correct

Botheffectivenessandperformancearecrucial for assessing control reliability.

A control may bedesigned effectively but fail in execution, makingboth factors essential.

Why Other Answers Are Incorrect

Option

Explanation

A. They are enhanced by the use of software that includes inherent risk.

Incorrect– Software can improve ratings, but control scales arebased on evaluation criteria, not just software tools.

B. A control rating scale should consider control effectiveness but not control performance.

Incorrect– Ignoring performance could lead tomisjudging actual control reliability.

D. A control rating scale should consider neither control effectiveness nor control performance.

Incorrect– This wouldrender the control rating scale useless.

PRMIA Governance and Control Framework

Basel Operational Risk Management Guidelines

PRMIA References for Verification

Internal loss investigationsanalyze past loss events toidentify root causes, improve controls, and enhance risk assessments.

Root Cause Analysis: Identifying why the loss occurred.

Focus on Remediation: Implementing corrective measures to prevent recurrence.

Scenario Analysis Improvement: Using lessons learned toenhance risk scenario modeling.

Option B ("Focus on who caused the issue")→ Incorrect because loss investigations are aboutsystemic issues, not assigning blame.

Option C ("Ascertain responsibility for the loss event")→ Incorrect because the focus is onprocess improvements, not individual accountability.

Option D ("Determined by HR on a case-by-case basis")→ Incorrect becauseHR does not dictate risk investigations—risk and compliance functions do.

tep 1: Purpose of Internal Loss InvestigationsStep 2: Why Option A Is CorrectStep 3: Why the Other Options Are Incorrect

PRMIA Operational Risk Framework– Emphasizes loss investigations for systemic risk management.

Basel III Risk Governance Standards– Defines loss event analysis as a key risk management tool.

PRMIA Risk References Used:

TheThree Lines of Defense (3LoD) modelensures thatrisk management responsibilities are properly segregated:

First Line: Business units (own and manage risk).

Second Line: Compliance and risk management (independent oversight).

Third Line: Internal audit (provides assurance).

PRMIA andBasel Compliance Principlesstate that compliance shouldnot report to business units, as this creates aconflict of interest.

Compliance must beindependent to ensure objective oversightof regulatory adherence.

Option A ("Report to the business")→ Incorrect becausecompliance must provide independent oversight, not report to business units.

Option C ("Outsource compliance if risk function exists")→ Incorrect becausecompliance and risk functions have distinct roles.

Option D ("Outsource risk if compliance exists")→ Incorrect becauserisk management is a core function, not an outsourcing candidate.

Step 1: Compliance Function and the Three Lines of Defense ModelStep 2: Why Compliance Must Be IndependentStep 3: Why the Other Options Are Incorrect

PRMIA Compliance Risk Governance– States compliance must beindependentunder the Three Lines of Defense model.

Basel Compliance Principles– Recommends separate reporting structures for compliance and business units.

PRMIA Risk References Used:

Final Conclusion:Compliance must be independent from the business to avoid conflicts of interest, makingOption B the correct answer.

TheTask Force on Climate-related Financial Disclosures (TCFD)was established todevelop climate-related financial risk disclosure recommendationsto help investors, lenders, and regulators make informed decisions.

TheFinancial Stability Board (FSB), an international organization that monitors and makes recommendations about the global financial system, founded theTCFD in 2015.

The FSB recognizedclimate risk as a financial stability issueand launched the TCFD to standardize reporting.

Option A ("World Bank")→ Incorrect because theWorld Bank supports climate initiativesbut did not create the TCFD.

Option B ("United Nations")→ Incorrect because theUN has climate programs like the UNFCCC, but not the TCFD.

Option D ("European Commission")→ Incorrect becausethe EC develops its own sustainability regulations (e.g., SFDR, CSRD), separate from the TCFD.

Step 1: What is the TCFD?Step 2: Who Founded the TCFD?Step 3: Why the Other Options Are Incorrect

PRMIA Climate Risk Guidelines– Cites FSB's role in founding the TCFD.

FSB Official Reports (2015)– Confirms that the FSB established the TCFD.

PRMIA Risk References Used:

Final Conclusion:TheFSB founded the TCFD in 2015, makingOption C the correct answer.

Definition of Governance

Governance refers tothe framework of policies, principles, and processesused toguide corporate decision-makingand strategic direction.

Itensures accountability, transparency, and risk oversightwithin an organization.

Key Elements of Governance

Risk oversight– Ensuring risks are properly identified and managed.

Accountability structures– Defining roles and responsibilities.

Decision-making frameworks– Establishing policies for long-term corporate success.

Why Other Answers Are Incorrect

Option

Explanation

A. Governance is a structure specifying the daily operation of a firm.

Incorrect– Governancefocuses on high-level corporate oversight, not day-to-day operations.

B. Governance is a structure specifying the ways in which reporting is made to the primary regulator.

Incorrect– Governance is broader than just regulatory reporting.

C. Governance is being replaced by management in all firms that are regulated.

Incorrect– Governance and management areseparate but complementary; governance provides oversight, while management executes strategy.

PRMIA 10 Principles of Good Governance

PRMIA References for Verification