FRM Part II · FRM Exam Part II · Risk Governance
A bank's board is reviewing its risk framework. Which statement best describes the relationship between risk appetite and risk limits in a sound operational risk governance framework?
Risk appetite is the aggregate amount and types of risk a firm is willing to accept in pursuit of its objectives, set by the board. Risk limits cascade from it, turning the appetite into operational boundaries for business units, so appetite drives limits and not the other way round.
- ARisk limits are set by the board and risk appetite is then derived from the sum of business-line limits
- BRisk appetite is the aggregate level and types of risk the firm is willing to accept to achieve its objectives, and limits translate it into operational boundaries for business unitsCorrect
- CRisk appetite and risk limits are interchangeable terms describing the maximum possible loss the firm could suffer
- DRisk limits apply only to financial risks, while risk appetite applies only to non-financial risks
Explanation
Risk appetite is set at the top, by the board, as the amount and type of risk the firm will accept to meet strategic goals. Limits cascade from it to business units and desks. Option A reverses the direction of derivation, which is the key error.
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