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FRM Part I · FRM Exam Part I · The Governance of Risk Management

A bank's board approves a risk appetite statement. Which of the following is the most appropriate way to cascade it into the organization?

The appropriate approach is to convert the board's risk appetite into quantitative limits and qualitative guidelines for each business line, consistent with the overall appetite, with breach monitoring and escalation. Informal desk tolerances, one VaR limit, or past losses do not link actions to the board's stated appetite.

  1. AKeep it at board level and let each desk define its own informal tolerance
  2. BTranslate it into quantitative limits and qualitative guidelines at business-line level, consistent with the overall appetite, and monitor breaches with escalationCorrect
  3. CSet a single firm-wide VaR limit and no other limits
  4. DReplace it with the prior year's realized losses as the limit

Explanation

Risk appetite must be operationalized through consistent limits and guidelines across business lines, with monitoring and escalation of breaches. Leaving desks to define tolerance breaks the link to the board's appetite. A single VaR limit ignores risks VaR misses, and realized losses are a backward-looking, inappropriate basis.

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