Operational Risk, Integrated Risk& Legal
Book 4 of our FRM Study Notes addresses the risk-related discipline of Operational and Integrated Risk Management, Legal. This material is uncharted territory for most FRM candidates, so be sure to take your time as you progress through this part of the curriculum. Operational and Integrated Risk Management, Legal will account for 25% of the questions on this year's FRM exam and is conveniently broken down into three sections:
Operational Risk Management
Integrated Risk Management
Legal Issues
Operational Risk Management
In our Study Notes, we have included a useful introduction to the concept of operational risk. This introduction serves to assist candidates in understanding the importance of managing operational risk. Many of the assigned readings in this section deal with models used to measure operational risk. You will learn about loss distributions and examine how these distributions can be separated into frequency and severity. There are two new readings on the loss distribution approach (LDA) this year. The material on LDA models is somewhat complex, so, as I suggested earlier, take your time as you review these topics. Other topics in this section deal with technology risk as a type of operational risk and model risk as a contributor to operational risk.
Integrated Risk Management
The topics in this integrated risk management section deal with viewing the firm as a whole and how resources can be pooled together to effectively manage risk. It is no surprise then that one of the topics examines enterprise risk management (the process of managing all of a firm’s risks within an integrated framework). Other topics look at ways to increase firm value via risk management and how to evaluate liquidity risk. The case studies provided in this section are interesting to say the least. For example, the rise and fall of Long-Term Capital Management is discussed. GARP has always placed emphasis on informing FRM candidates of past risk management failures in hopes of preventing similar events from occurring in the future.
Legal Issues
The legal issues examined relate to banking regulation. Understanding the Basel II Accord is imperative, as you will see numerous questions related to Basel on the exam. The three assigned Basel reference readings in the FRM curriculum cover a lot of ground and although GARP has stated that candidates are not expected to memorize specific details from the Basel material, we do encourage you to look through the assigned readings in addition to our summarizes. These readings are free to download from GARP’s Digital Library.