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 of the following features is most consistent with good practice for an effective RAS?

A good risk appetite statement ties the board's risk tolerance to the firm's strategy and converts it into measurable limits that business units can apply and monitor. Profit targets alone, purely qualitative wording, or business-line-only drafting fail to give the board effective oversight and control.

  1. AIt sets only a single aggregate profit target, leaving risk limits to individual traders
  2. BIt links the board's tolerance for risk to the firm's strategy and translates it into measurable limits that business units can applyCorrect
  3. CIt is written in qualitative terms only so that it never needs to be revised
  4. DIt is prepared by the business lines alone and shared with the board only after year-end

Explanation

An effective RAS expresses the amount and types of risk the firm is willing to take to pursue its strategy, and cascades into quantitative metrics and limits usable by business units. A profit target alone says nothing about risk. A purely qualitative, never-revised statement cannot be monitored, and the board must own and approve the RAS rather than receive it after the fact.

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