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FRM Part I · FRM Exam Part I · The Governance of Risk Management

A bank's board wants to make its risk appetite statement operational. Which step most directly converts the board-level appetite into day-to-day constraints for individual business units?

Cascading the board's risk appetite into specific limits and tolerances for each business line, supported by monitoring and breach escalation procedures, makes appetite operational. Merely publishing it, making audit approve trades, or equating it to the regulatory minimum does not create effective day-to-day constraints.

  1. APublishing the appetite statement in the annual report
  2. BCascading it into risk limits and tolerances allocated to business lines, with escalation procedures for breachesCorrect
  3. CRequiring the internal audit department to approve every trade
  4. DSetting the appetite equal to the regulatory minimum capital ratio

Explanation

Operationalizing appetite means translating aggregate board-level tolerance into specific limits (such as VaR, concentration, or notional limits) for business units, along with monitoring and breach escalation. Disclosure alone does not constrain behavior, audit approval of trades is not an audit function, and setting appetite at the regulatory minimum leaves no buffer.

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