FRM Part II · FRM Exam Part II · Risk Governance
A bank's internal audit finds that the operational risk reports to the board contain only realized loss totals by business line, with no forward-looking indicators, control weakness trends or scenario results. The board has set a low-tolerance appetite for technology failures. Which remediation best satisfies the Basel principles on risk reporting and appetite?
The best remediation is to add key risk indicators with thresholds tied to risk appetite, control deficiency trends and scenario results, escalating breaches to the board. Sound reporting must be forward-looking and linked to tolerance, not just a backward-looking total of realized losses.
- AKeep loss totals, but add key risk indicators with thresholds linked to appetite, control deficiency trends, and scenario analysis, escalated to the board when limits are breachedCorrect
- BReplace the loss totals with the number of audit findings only
- CReport losses quarterly instead of monthly to reduce noise
- DMove reporting to business lines and stop board reporting to prevent information overload
Explanation
Sound practice requires reporting that is timely and includes both internal financial data and non-financial, forward-looking information such as indicators, control breaches and external events, linked to appetite and escalated on breach. Audit finding counts alone lack loss and indicator context. Less frequent or no board reporting weakens oversight. Therefore adding thresholded indicators, control trends and scenarios is the best fix.
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