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FRM Part II · FRM Exam Part II · Risk Governance

A bank's board wants its operational risk appetite to be effective in practice. Which approach best achieves this?

The best approach is board-approved risk appetite translated into quantitative limits and triggers, such as loss and key risk indicator thresholds, cascaded to business units with clear escalation procedures. This makes appetite measurable, monitorable and actionable rather than a vague statement.

  1. AA single qualitative statement that the bank has low tolerance for losses, with no metrics
  2. BRisk appetite expressed with quantitative limits and triggers (e.g., loss and key risk indicator thresholds) cascaded to business units with escalation proceduresCorrect
  3. CRisk appetite set by the first line alone, without board review, to reflect business needs
  4. DRisk appetite defined only as a regulatory capital figure reviewed once at inception

Explanation

Effective appetite is approved by the board and translated into measurable limits, triggers and escalation paths so that breaches can be detected and acted on. Qualitative-only statements cannot be monitored, first-line-only setting lacks oversight, and a one-time capital figure is not dynamic.

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