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

A bank's board has approved a risk appetite statement. Which of the following implementations is most consistent with an effective risk management framework in which appetite is cascaded through the organization?

Risk appetite should be cascaded into limits for business units, with defined escalation of breaches and regular reporting to the board. Making limits optional, disconnecting appetite from strategy, or using only VaR and ignoring qualitative statements leaves the framework incomplete and ineffective.

  1. ATranslating the appetite into limits for business units, with breaches escalated through defined procedures and reported to the boardCorrect
  2. BSetting a single firm-wide limit and letting each desk decide independently whether it applies
  3. CReviewing the risk appetite only when a regulator requests it, with no link to strategy or limits
  4. DRelying solely on the quantitative VaR measure and excluding qualitative risk statements

Explanation

An effective framework links appetite to strategy, translates it into granular limits, and has escalation and board reporting for breaches. Optional limits, no strategic link, or ignoring qualitative statements (such as for reputational or conduct risk) leave gaps.

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