Skip to content

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

A bank's board is drafting its risk appetite statement (RAS). Which feature would make the RAS most effective as a governance tool?

An effective risk appetite statement pairs qualitative statements with quantitative limits and metrics that can be cascaded to business lines and monitored. This makes the board's risk tolerance measurable and enforceable, whereas purely qualitative, static, or business-unit-only statements cannot be monitored or aligned with strategy.

  1. AIt sets out only qualitative aspirations so that management keeps maximum flexibility
  2. BIt combines qualitative statements with quantitative limits and metrics that can be cascaded to business lines and monitoredCorrect
  3. CIt is prepared solely by the business units and shared with the board after approval by the CEO
  4. DIt is set once at inception of the firm and left unchanged to ensure consistency

Explanation

An effective RAS translates the board's tolerance for risk into measurable limits and metrics, linked to strategy, which can be cascaded down and monitored. Purely qualitative statements cannot be monitored, and a RAS should be board-approved and reviewed regularly rather than fixed forever or written only by business units.

Did you get it right without looking?

One question tells you little. A timed set on The Governance of Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise The Governance of Risk ManagementFree diagnostic mock

More The Governance of Risk Management questions