FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience
A bank's board wants to articulate how much operational risk it is willing to accept. Which approach best reflects sound operational risk governance regarding risk appetite?
Sound governance has the board approve a risk appetite combining qualitative statements with quantitative limits and tolerances, cascaded to business lines and tied to key risk indicators and escalation triggers. This keeps accountability with the board while making the appetite measurable and actionable.
- ASet a single annual loss limit and leave business units to interpret it without further cascade
- BDefine qualitative statements and quantitative limits and tolerances approved by the board, cascaded to business lines and linked to KRIs and escalation triggersCorrect
- CDelegate risk appetite entirely to the operational risk function because the board lacks technical knowledge
- DSet the appetite at zero losses so that all events are reported to the board
Explanation
Effective appetite is approved by the board, combines qualitative and quantitative elements, is cascaded to units, and is tied to indicators and escalation. A single uncascaded limit lacks actionability; delegating removes board accountability; a zero appetite is unrealistic and unworkable.
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