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

A bank's board is reviewing its strategic plan. Which description best captures strategic risk as treated in an enterprise risk management framework?

Strategic risk is the risk that business decisions, poor execution of strategy, or failure to adapt to a changing environment will reduce earnings or capital relative to objectives. It differs from operational, credit and liquidity risk, which arise from processes, counterparties and market depth respectively.

  1. AThe risk that business decisions, or their poor execution or failure to adapt to change, will reduce earnings or capital relative to the firm's objectivesCorrect
  2. BThe risk of loss from inadequate internal processes, people and systems
  3. CThe risk that a counterparty fails to meet its contractual obligations
  4. DThe risk that positions cannot be sold without a significant price concession

Explanation

Strategic risk arises from the choice of business strategy, its implementation, and failure to respond to industry or environmental change. Option B describes operational risk, C credit risk, and D liquidity risk.

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