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FRM Part I · FRM Exam Part I · Operational Risk

A bank's board is reviewing its operational risk appetite statement. Which of the following features would best indicate that the statement is effective under sound governance practice?

An effective operational risk appetite statement is board-approved, tied to measurable tolerance limits and key risk indicators, and reviewed periodically. This lets management monitor breaches and act. Static, purely qualitative statements cannot be monitored, and internal audit owning it would undermine its independence.

  1. AIt is set once at inception and left unchanged to maintain consistency
  2. BIt is expressed only in qualitative terms to avoid breaching limits
  3. CIt is approved by the board, linked to measurable tolerance limits and key risk indicators, and reviewed periodicallyCorrect
  4. DIt is owned by the internal audit function, which sets limits for each business line

Explanation

Good practice has the board approve and periodically review a risk appetite that is translated into measurable limits and indicators that management monitors. Static or purely qualitative statements cannot be monitored. Internal audit should not own it, since that would compromise its independence; management proposes and the board approves.

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