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FRM Part II · FRM Exam Part II · Risk Governance

A bank sets a quarterly operational loss tolerance of USD 12 million for each of its four business lines and an aggregate firm-wide appetite of USD 36 million per quarter. Business lines' actual quarterly losses are A: USD 9 million, B: USD 11 million, C: USD 8 million, D: USD 10 million. Which assessment is correct?

Combined losses are USD 38 million, above the USD 36 million firm-wide appetite, even though each business line is under its USD 12 million tolerance. Unit limits sum to more than the aggregate appetite, so the breach must be escalated at the firm level.

  1. AEvery business line is within its tolerance, but aggregate losses of USD 38 million exceed the firm-wide appetite of USD 36 million, so the issue should be escalatedCorrect
  2. BAll limits are met because no business line exceeds USD 12 million
  3. CAggregate losses are USD 34 million, within appetite, so no action is needed
  4. DBusiness line B has breached its tolerance because it is above the average of USD 9.5 million

Explanation

Sum = 9 + 11 + 8 + 10 = 38, which exceeds 36 by USD 2 million, although each unit is below 12. The sum of individual tolerances (48) exceeds the aggregate appetite (36), so unit compliance does not guarantee firm-level compliance. Option B ignores aggregation; option D uses an irrelevant average.

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