LO 42.2: Explain ways in which data from different external sources may differ.

LO 42.2: Explain ways in which data from different external sources may differ.
Differences in the collection methods between the ORX and the FIRST databases have an interesting impact on the relative distribution of the loss data.
Size and Frequency of Losses by Risk Category
When comparing the size of losses by risk category in the ORX and FIRST databases, we see that the FIRST database has a significantly higher percentage of losses for Internal Fraud than ORX does. In contrast, ORX has a significantly higher percent of Execution, Delivery,
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Topic 42 Cross Reference to GARP Assigned Reading – Girling, Chapter 8
and Process Management losses than does FIRST. This could be because not all Execution, Delivery, and Process Management losses are reported by the press, implying that the FIRST database is missing many events and has an unavoidable collection bias.
The primary difference between these two databases with respect to Execution, Delivery, and Process Management events is that ORX data is supplied directly from member banks, which does not include all banks, implying that ORX also suffers from collection bias. This is in contrast to the FIRST database that collects data on all firms, including a significant number of firms outside of Basel II compliance.
Regarding the frequency of losses by risk category, Execution, Delivery, and Process Management events are missing from FIRST data, presumably because they rarely get press coverage. ORX has a larger frequency of External Fraud than FIRST, which suggests that such events are often kept from the press. ORX data also shows a large amount of External Fraud due to the participation of retail banks in the consortium. This is because Retail Banking includes credit card services, which causes this category to be driven by numerous small instances of fraud in retail banking and credit cards. The threshold for reporting loss data to ORX is 20,000.
Size and Frequency of Losses by Business Line
When comparing the size of losses by business lines in the ORX and FIRST databases, ORX losses are heavily weighted toward Retail Banking. Also, Commercial Banking accounts for a smaller percentage of losses for ORX than for FIRST, which may be due to recent commercial banking events making it into the press and, therefore, into the FIRST database (but not the ORX database).
Regarding the frequency of losses by business line, ORX data is driven by Retail Banking events, whereas FIRST events are more evenly distributed among the various business lines. Also, the majority of events for ORX and FIRST occur in Retail Banking but by a slimmer margin for the FIRST database.
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