PRMIA 8020 Exam Dumps

Step 1: Definition of Risk Capacity

Risk Capacity refers to the maximum level of risk a bank can absorb while still maintaining orderly operations or, in extreme cases, conducting an orderly resolution.

PRMIA and Basel III define risk capacity as a bank's ability to absorb losses in a crisis without systemic consequences.

Step 2: Why Option D Is Correct

The ultimate test of a bank's risk capacity is whether it can survive an extreme shock without harming depositors or financial markets.

Regulators ensure that a bank can be wound up in an orderly manner so that only shareholders lose money, while depositors and creditors remain protected under resolution planning frameworks.

Step 3: Why the Other Options Are Incorrect

Option A ('Amount of risk the bank wishes to take')

Incorrect because this describes Risk Appetite, not Risk Capacity.

Option B ('Amount of risk the regulator sets for the bank')

Incorrect because regulators set capital requirements, but the bank's actual risk capacity is based on its own capital structure and business model.

Option C ('Ability to withstand an extreme event and make a profit')

Incorrect because risk capacity is about survival, not profit-making during extreme events.

PRMIA Risk Reference Used:

Basel III Risk Capacity Standards -- Defines the ability to absorb losses during crises.

PRMIA Risk Governance Framework -- Describes how banks should manage risk capacity through capital buffers.

Final Conclusion:

Banks must be able to withstand an extreme event and conduct an orderly wind-up if necessary, ensuring that only shareholders bear the loss, making Option D the correct answer.

Role of the Risk Function

The risk function is responsible for documenting, monitoring, and overseeing risk policies and frameworks.

It ensures the organization maintains structured risk governance, reporting, and compliance.

Key Responsibilities

Developing Risk Management Manuals to define risk appetite, risk frameworks, and risk governance structures.

Creating Risk Policies that align with regulatory standards and internal controls.

Why Answer B is Correct

The risk function primarily develops, implements, and maintains risk management frameworks, which include formal manuals and policies.

Why Other Answers Are Incorrect

Option

Explanation

A . Documenting its activities, typically by operating and then recording the daily operation of controls.

Incorrect -- The first line of defense (business units) handles daily operational controls, not the risk function.

C . Putting in place the servers, firewalls, and software to ensure cybersecurity.

Incorrect -- Cybersecurity is an IT responsibility, while the risk function oversees cyber risk frameworks.

D . Creating a trial balance, balance sheet statement, and cash flow statement.

Incorrect -- These are financial accounting responsibilities, not risk management duties.

PRMIA Reference for Verification

PRMIA Governance Framework for Risk Management

Basel Risk Management Principles

Definition of Bottom-Up Key Risk Indicators (KRIs)

Bottom-up KRIs are generated from operational-level data rather than high-level strategic indicators.

They are useful for monitoring localized risks but may fail to capture broad risk drivers.

Key Deficiencies of Bottom-Up KRIs

Lack of clarity on causal relationships -- These indicators may detect risk trends but fail to explain root causes.

Focus on micro-level risks -- They may miss systemic or enterprise-wide risk interactions.

Why Answer B is Correct

Bottom-up KRIs may indicate changes in risk levels but lack insight into the underlying causes, leading to reactive rather than proactive risk management.

Why Other Answers Are Incorrect

Option

Explanation

A . Mandates from a board that are too restrictive to implement.

Incorrect -- Board mandates apply to top-down governance, not bottom-up KRIs.

C . Not reported frequently enough.

Incorrect -- Reporting frequency is an issue but not the primary deficiency; rather, it's the lack of causal insight.

D . Lack of granularity.

Incorrect -- Bottom-up KRIs tend to be highly detailed (granular), making this answer incorrect.

PRMIA Reference for Verification

PRMIA Key Risk Indicator Best Practices

Basel Committee's Risk Measurement and Reporting Framework

Step 1: Definition of Material Customer Detriment

Material customer detriment refers to service disruptions that cause financial loss, inability to access essential services, or significant hardship.

PRMIA and UK FCA Operational Resilience Standards define 'significant harm' as going beyond inconvenience to include monetary or operational distress.

Step 2: Why Option D is Correct

Significant harm occurs when customers face tangible financial or service losses, not just reputational inconvenience.

Regulatory frameworks (e.g., Basel, FCA, PRMIA) require banks to protect customers from material disruptions.

Step 3: Why the Other Options Are Incorrect

Option A ('Low threshold, any complaint') Incorrect because not all complaints indicate material detriment.

Option B ('Inconvenience and reputational damage') Incorrect because true material harm is more than just inconvenience.

Option C ('Financial system resilience') Incorrect because this describes systemic financial stability, not customer impact.

PRMIA Risk Reference Used:

PRMIA Operational Resilience Framework -- Defines material customer detriment.

UK FCA Operational Resilience Guidelines -- Requires firms to minimize severe harm to customers.

Final Conclusion:

Material customer detriment involves actual financial hardship, not just inconvenience, making Option D the correct answer.

Third-Party Risk Management (TPRM)

PRMIA highlights the importance of conducting thorough due diligence on third-party vendors and service providers.

This includes evaluating compliance programs, risk management frameworks, financial stability, strategic objectives, and operational history.

Key Areas of Third-Party Risk Assessment

Compliance and Risk Infrastructure Ensures that the provider meets regulatory and security requirements.

Financial Health Determines whether the provider has the financial stability to support long-term service delivery.

Business Strategy Helps assess alignment with the organization's risk appetite and goals.

Operating History Evaluates experience and reliability in delivering services.

Why Other Answers Are Incorrect

Option

Explanation

B . An assessment of a third party should not include its compliance and risk infrastructure, financials, business strategy, and operating history.

Incorrect -- Ignoring these critical factors increases the risk of working with an unreliable vendor.

C . Onsite visits are not advantageous for understanding the third party's risks and control environment.

Incorrect -- Onsite visits are highly valuable as they provide first-hand insights into operational controls. PRMIA encourages risk managers to conduct site visits.

D . A review of the pay levels of the staff supporting the service.

Incorrect -- Employee salaries are not a primary risk factor in vendor assessments. The focus should be on the vendor's security, compliance, and operational risks.

PRMIA Reference for Verification

PRMIA Third-Party Risk Management (TPRM) Guidelines -- Details best practices for vendor risk assessments.

Basel Principles on Outsourcing and Third-Party Risk -- Provides regulatory guidance on evaluating third-party service providers.