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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 would make the RAS most effective as a governance tool?

The RAS is most effective when it sets quantitative boundaries on tolerated loss and is cascaded into business-unit limits. This makes risk appetite measurable, monitorable and actionable, whereas qualitative-only, CRO-only or breach-triggered approaches weaken board oversight and practical use.

  1. AIt states the maximum loss the bank is willing to tolerate in quantitative terms and is cascaded into business-unit limitsCorrect
  2. BIt is written only in qualitative language so that management retains maximum flexibility
  3. CIt is set by the chief risk officer alone without board involvement to preserve independence
  4. DIt is reviewed only when a regulatory breach occurs

Explanation

An effective RAS combines qualitative statements with quantitative boundaries and is translated into limits that business units apply daily. Purely qualitative statements cannot be monitored, the board must approve the RAS, and it should be reviewed regularly rather than only after a breach.

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