FRM Part II · FRM Exam Part II · Risk Governance
A bank's board wants to set an operational risk appetite statement. Which approach best reflects sound governance practice?
The board should approve a risk appetite statement combining qualitative statements and quantitative limits or tolerances, tied to strategy and monitored regularly. Management-only setting, uniform limits without board input, or a zero-loss target are inconsistent with sound operational risk governance.
- AManagement sets the appetite privately and informs the board only after a breach occurs
- BThe board approves the appetite, expressed with both qualitative statements and quantitative limits or tolerances that are linked to business strategy and monitoredCorrect
- CThe operational risk function sets a single loss limit that applies unchanged to every business line, without board involvement
- DThe appetite is defined only as a target of zero operational losses
Explanation
Good practice has the board approve a risk appetite that combines qualitative statements with quantitative metrics, aligned with strategy and regularly monitored. Zero-loss targets are unrealistic, and excluding the board or using one uniform limit ignores differing business risk profiles.
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