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FRM Part I · FRM Exam Part I · Enterprise Risk Management and Future Trends

A bank's board is reviewing its enterprise risk management (ERM) program. Which of the following best describes the primary distinguishing feature of ERM compared with a traditional silo-based approach to risk management?

ERM differs from silo risk management because it takes an integrated, firm-wide view of all material risks, accounting for interdependencies and total exposure against the board's risk appetite, rather than letting each business unit manage its own risks separately with its own metrics.

  1. AEach business unit independently manages its own risks using its own metrics and reports only to its line manager
  2. BRisks are viewed and managed on an integrated, firm-wide basis, considering interdependencies and aggregate exposure relative to risk appetiteCorrect
  3. COnly financial risks that can be quantified using VaR are included in the program
  4. DRisk management is outsourced to an external insurer so the firm no longer retains any risk

Explanation

ERM aggregates and manages all material risks across the firm in an integrated way, recognizing correlations and the total exposure against the board's risk appetite. Silo approaches manage risks separately by unit, which is the option describing the traditional model. Limiting ERM to VaR-measurable risks or outsourcing it entirely misstates the framework.

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