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FRM Part I · FRM Exam Part I · Operational Risk

A bank's board wants to define its operational risk appetite so that it is actionable. Which of the following is the best approach?

The best approach is board-approved, measurable limits and thresholds, such as key risk indicators and loss tolerances, linked to strategy and monitored with escalation triggers. Zero-loss statements are unachievable, static appetites ignore strategy changes, and internal audit must remain independent rather than set appetite.

  1. AState a single qualitative commitment to avoid all operational losses
  2. BSet the appetite once at inception and leave it unchanged regardless of business strategy
  3. CDelegate the setting of appetite entirely to the internal audit function
  4. DSet board-approved limits and thresholds, such as key risk indicators and loss tolerance levels, linked to strategy and monitored with escalation triggersCorrect

Explanation

An effective risk appetite statement is approved by the board, aligned with strategy, and translated into measurable limits and thresholds with escalation when breached. A zero-loss commitment is unrealistic and not measurable. A static appetite ignores changing strategy, and audit is independent so should not set it.

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