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FRM Part II · FRM Exam Part II · Integrated Risk Management

A bank's board sets a risk appetite of a maximum annual operational loss of USD 40 million. The chief risk officer sets a risk tolerance trigger at USD 30 million and a business-line limit of USD 12 million for retail banking. Mid-year, retail banking's cumulative operational losses reach USD 13.5 million, while firmwide losses are USD 24 million. What is the most appropriate governance response?

The retail unit has breached its USD 12 million limit with USD 13.5 million of losses, so the breach should be escalated to senior management and the risk committee with a remediation plan. Firmwide totals being under the trigger does not excuse a unit-level breach, and appetite should not be raised retroactively.

  1. ANo action, because firmwide losses are below the USD 30 million trigger
  2. BEscalate the retail limit breach to senior management and the risk committee, with a remediation planCorrect
  3. CRaise the USD 40 million board appetite so the breach disappears
  4. DWait until firmwide losses reach USD 40 million before reporting to the board

Explanation

The retail banking limit of USD 12 million is breached at USD 13.5 million, regardless of the firmwide total being below the USD 30 million trigger. Limit breaches should be escalated with a remediation plan. Changing appetite to remove a breach undermines the framework, and waiting for the board-level maximum is too late.

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