FRM Part II · FRM Exam Part II · Risk Governance
A bank's board approved an operational risk appetite statement. Senior management then reports to the board that the quarterly loss figure is under the stated loss limit, but the report omits that several key risk indicators breached their thresholds and that two large near-miss events occurred. Which assessment is most consistent with the Basel principles?
The reporting is deficient. Under the Basel principles, board reports should cover exposures, including key risk indicator breaches and near-miss events, not just realised losses, so the board can judge whether the bank is within its risk appetite and tolerance and act in time.
- AAcceptable, because losses are the only objective measure of operational risk exposure
- BAcceptable, because near misses and indicator breaches are only for the first line to review
- CDeficient, because reporting should give the board information on exposures, including indicator breaches and near-miss events, so that it can judge whether the bank operates within its risk appetite and toleranceCorrect
- DDeficient only because the loss limit should be set to zero
Explanation
The principles call for reporting that gives the board and senior management enough information to understand the bank's risk profile and react to changes, including breaches of thresholds and loss or near-miss events. Losses alone are backward looking, so the omissions weaken the board's oversight of appetite. Zero tolerance is not required.
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