How do you quantify operational risk?
A core Risk & Compliance interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
(1) Loss data collection: record all operational loss events above threshold. (2) Scenario analysis: estimate frequency and severity of low-frequency/high-severity events. (3) KRIs: track leading indicators. (4) Basel methods: Basic Indicator Approach (15% of gross income) or Advanced Measurement Approach (internal models). (5) Stress testing: model extreme but plausible scenarios.
WHAT INTERVIEWERS LISTEN FOR
- ✓Loss data collection
- ✓Scenario analysis
- ✓Key Risk Indicators (KRIs)
- ✓Basel methods (BIA/AMA)
- ✓Stress testing
COMMON MISTAKES
- ✗Confusing operational risk with market/credit risk
- ✗Ignoring low-frequency/high-severity events
- ✗Relying solely on qualitative assessment
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