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FRM Part II · FRM Exam Part II · Integrated Risk Management

A bank's ERM framework defines a risk appetite statement. Which of the following is the best example of how the appetite should be cascaded into day-to-day management?

The best practice is for the board to approve the risk appetite and cascade it into specific limits and tolerances for business units, which are then monitored and reported. Private, unit-defined, or event-triggered appetite fails to align risk-taking with strategy and board oversight.

  1. AThe board approves the statement, and it is translated into risk limits and tolerances for business units that are monitored and reported againstCorrect
  2. BThe CRO sets the appetite privately and shares it only with regulators
  3. CEach business unit defines its own appetite independently of the board's strategy
  4. DThe appetite is reviewed only when a large loss occurs

Explanation

An effective ERM framework has the board set appetite aligned with strategy, then translates it into measurable limits and tolerances at business-unit level with ongoing monitoring and reporting. Keeping it private, letting units define their own, or reviewing it only after losses defeats the purpose of governance.

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