FRM Part II · FRM Exam Part II · Risk Governance
A bank's board has approved an operational risk framework, but the document does not say how much operational risk the bank is willing to accept in pursuit of its strategy. Which action best aligns with the Basel principles?
The board should approve and periodically review an operational risk appetite and tolerance statement consistent with strategy. Board accountability cannot be delegated to business lines or audit, and waiting for a loss event is reactive rather than the forward-looking governance the Basel principles require.
- AHave the board approve and review a risk appetite and tolerance statement for operational risk, taking account of the bank's strategyCorrect
- BDelegate the setting of risk appetite entirely to each business line manager
- CWait for the internal audit function to define acceptable loss levels
- DSet appetite only after a major loss event has occurred
Explanation
The principles expect the board to approve and review a risk appetite and tolerance statement that articulates the nature, types and levels of operational risk the bank is willing to assume. Full delegation to business lines or audit would abandon board accountability. Waiting for a loss event is reactive, not sound practice.
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