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PRMIA ORM Certificate - 2023 Update Sample Questions (Q15-Q20):

NEW QUESTION # 15
Which of the Basel Accords, published in 2004, introduced operational risk as a risk subjected to a capital charge?

A. Basel II
B. Basel IV
C. Basel III
D. Basel I

Answer: A

Explanation:
Introduction of Operational Risk in Basel Accords
Basel I (1988) → Focused only on credit risk and market risk; operational risk was not yet included.
Basel II (2004) → Introduced operational risk as a separate category, subject to capital requirements.
Basel III (2010) → Strengthened capital and liquidity requirements but did not introduce operational risk.
Basel IV (2017, still evolving) → Adjusts Basel III reforms but does not introduce operational risk as a new category.
Why Answer B is Correct
Basel II (2004) was the first to introduce operational risk as a risk requiring a capital charge.
Why Other Answers Are Incorrect
Option
Explanation:
A . Basel I
Incorrect - Basel I focused on credit risk and market risk, with no capital requirements for operational risk.
C . Basel III
Incorrect - Basel III strengthened Basel II but did not introduce operational risk.
D . Basel IV
Incorrect - Basel IV refines Basel III but does not introduce operational risk as a new capital charge.
PRMIA Reference for Verification
Basel II (2004) Operational Risk Framework
PRMIA Operational Risk Management Guidelines

NEW QUESTION # 16
The Internal Loss Multiplier (ILM) is part of the Basel III Standardized Approach. Which of these definitions best descibes it?

A. It is a non-financial factor that is based on a bank's average historical losses.
B. It is a financial-statement-based proxy for operational risk.
C. t is a scaling factor that is based on a bank's average historical losses.
D. It is uniform, and is used for indicating consistent incidents on an average return basis.

Answer: C

Explanation:
The Internal Loss Multiplier (ILM) is a key component of the Basel III Standardized Approach for Operational Risk. It is designed to adjust capital requirements based on a bank's historical loss experience.
Definition of ILM
ILM is a scaling factor that adjusts the operational risk capital requirement based on a bank's internal loss history.
It is derived using a formula that incorporates historical operational risk losses relative to a bank's revenue.
Why ILM Exists in Basel III
Basel III replaced the Advanced Measurement Approach (AMA) with a Standardized Approach that includes ILM to ensure that banks with high historical losses hold more capital for operational risk.
Why Other Answers Are Incorrect
Option
Explanation:
A . It is a financial-statement-based proxy for operational risk.
Incorrect - ILM is not a general financial statement proxy; it specifically adjusts capital based on past operational losses.
B . It is a non-financial factor that is based on a bank's average historical losses.
Incorrect - ILM is financial in nature because it directly influences capital requirements.
D . It is uniform, and is used for indicating consistent incidents on an average return basis.
Incorrect - ILM is not uniform; it is bank-specific and varies based on loss history.
PRMIA Reference for Verification
PRMIA Operational Risk Standards
Basel III Standardized Approach for Operational Risk

NEW QUESTION # 17
In relation to the template for writing policy documents, which one of the following pairings of requirements is correct? A well designed policy will include:

A. A list of exceptions for the family of board members.
B. To whom and in what form exceptions should be sought and the general exemptions e.g. areas to which the policy does not apply
C. To whom the policy applies to and how an additional management report should be allocated to.
D. A list of acceptable fonts and margin types.

Answer: B

Explanation:
Step 1: Key Elements of a Well-Designed Policy Document
A well-designed policy should include:
Scope - Who the policy applies to.
Exception Handling - How and where exceptions should be requested.
Accountability - Who is responsible for enforcement.
Step 2: Why Option C is Correct
A policy must clearly define exceptions and the process for requesting them.
It should also define areas where the policy does not apply to avoid confusion.
Step 3: Why the Other Options Are Incorrect
Option A ("List of exceptions for board members' families") → Incorrect because policies should apply consistently to all stakeholders.
Option B ("List of acceptable fonts and margin types") → Incorrect because formatting is secondary to content clarity.
Option D ("To whom the policy applies and an additional management report") → Incorrect because policy scope should not include unnecessary reports.
PRMIA Risk Reference Used:
PRMIA Policy Writing Guidelines - Defines policy structure and exception handling.
ISO 19600 Compliance Management Standard - Supports clear, well-documented policies.
Final Conclusion:
A well-designed policy clearly defines exceptions and their handling process, making Option C the correct answer.

NEW QUESTION # 18
What are some of the properties of Bottom-Up KRIs?

A. Seated by senior management: tied to internal loss events at the legal entity, country, business and / or product level, reported.
daily, weekly or monthly.
B. Selected by local management, based on key controls or weaknesses identified by audit reports, reported on quarterly.
C. Are not used due to changes in regulations.
D. Selected by local management: tied to internal loss events at the legal entity, country, business and / or product level, reported daily, weekly or monthly.

Answer: D

Explanation:
Definition of Bottom-Up KRIs
Bottom-Up Key Risk Indicators (KRIs) are identified at the operational level, focusing on localized risks within business units.
They are tied to actual internal loss events and reported frequently (daily, weekly, or monthly) to capture ongoing trends.
Key Properties of Bottom-Up KRIs
Selected by local management → Ensures relevance to specific business areas.
Tied to internal loss events → Helps in tracking risk patterns within specific legal entities, countries, or business units.
Reported frequently → Allows for timely risk detection and mitigation.
Why Answer D is Correct
Bottom-up KRIs focus on localized risk exposure and are monitored frequently to track operational changes.
Why Other Answers Are Incorrect
Option
Explanation:
A . Seated by senior management: tied to internal loss events at the legal entity, country, business, and/or product level, reported daily, weekly, or monthly.
Incorrect - Senior management sets top-down KRIs, while bottom-up KRIs are managed locally.
B . Selected by local management, based on key controls or weaknesses identified by audit reports, reported quarterly.
Incorrect - While audit reports are useful, bottom-up KRIs are based on loss events, not just audit findings. Quarterly reporting is too infrequent.
C . Are not used due to changes in regulations.
Incorrect - Bottom-up KRIs remain essential despite regulatory changes.
PRMIA Reference for Verification
PRMIA Risk Indicator Best Practices
Basel Committee's Risk Measurement and Reporting Guidelines

NEW QUESTION # 19
Which of the following statements best defines the properties of top-down key risk indicators?

A. Selected by senior management, tied to material external and internal loss exposures and scenarios, and used to manage changes in the business environment, especially under periods of stress.
B. Can only be selected by the board in line with risk ratings.
C. Selected by senior management, used to manage changes in the business environment especially under periods of stress, and reported on a daily basis.
D. Selected by junior management, used to manage changes in the business environment especially under periods of stress, and reported on an annual basis

Answer: A

Explanation:
Definition of Key Risk Indicators (KRIs)
KRIs are quantitative metrics used to monitor risk levels and detect early warning signs of potential risk events.
Top-down KRIs are identified at the senior management level and focus on enterprise-wide risk exposure.
Key Properties of Top-Down KRIs
Selected by senior management to ensure alignment with strategic objectives.
Tied to material external and internal loss exposures to capture critical financial, operational, and strategic risks.
Used to manage changes in the business environment to ensure proactive risk response, especially under stress conditions.
Why Other Answers Are Incorrect
Option
Explanation:
B . Selected by senior management, used to manage changes in the business environment, especially under periods of stress, and reported on a daily basis.
Incorrect - Top-down KRIs are not reported daily; they are monitored periodically (e.g., quarterly).
C . Selected by junior management, used to manage changes in the business environment, especially under periods of stress, and reported on an annual basis.
Incorrect - Junior management does not define top-down KRIs; senior management does. Also, annual reporting is too infrequent.
D . Can only be selected by the board in line with risk ratings.
Incorrect - The board provides oversight, but senior risk management selects KRIs, not just the board.
PRMIA Reference for Verification
PRMIA Risk Indicator Guidelines
Basel Committee on Banking Supervision (BCBS) Principles for Effective Risk Data Aggregation

NEW QUESTION # 20
......

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