FRM Part I · FRM Exam Part I · The Governance of Risk Management
A bank's board is assessing its risk appetite framework after a crisis in which the firm's risk limits were repeatedly raised to accommodate business growth. Which of the following changes would most improve governance of risk appetite?
The board should approve a risk appetite statement linked to strategy and capital, with limit breaches and increases escalated to the independent risk function and the board. This prevents businesses from loosening limits to chase growth and makes the appetite enforceable rather than aspirational.
- AAllow business heads to approve increases in their own limits when they forecast higher revenue
- BHave the board approve a risk appetite statement linked to strategy and capital, with limit breaches and increases escalated to the risk function and board for approvalCorrect
- CSet the risk appetite once at inception and never review it to maintain stability
- DExpress risk appetite only in qualitative terms to avoid false precision
Explanation
Effective risk appetite is set or approved by the board, tied to strategy and capital, expressed with quantitative limits, and enforced through independent escalation. Letting business heads raise their own limits recreates the failure, and never reviewing or using only qualitative terms makes the framework unenforceable.
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