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FRM Part II · FRM Exam Part II · Governance

A bank's board approves a credit risk appetite statement. Which element is most consistent with effective governance of that statement?

Effective governance cascades quantitative limits to business lines, reports breaches to the board and defines escalation and consequences for exceedances. This makes the appetite measurable and enforceable. Vague zero-loss aims, business-head-set limits or review only on regulator request leave the board without real control.

  1. AQuantitative limits cascaded to business lines, regular reporting of breaches to the board, and defined consequences and escalation for exceedancesCorrect
  2. BA qualitative statement that the bank will avoid all losses
  3. CLimits set solely by the head of the largest business line without board review
  4. DAppetite reviewed only when regulators request it

Explanation

An effective appetite framework is board-approved, translated into measurable limits, monitored, and enforced through escalation of breaches. Zero-loss goals are unrealistic, and limits set by a business head or reviewed only on regulatory request lack independence and regularity.

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