FRM Part II · FRM Exam Part II · Risk Governance

A bank's operational risk appetite statement sets a tolerance that annual operational loss events must not exceed USD 40 million. Year-to-date losses are USD 31 million at the end of month 9. The bank's escalation policy requires escalation to the risk committee when losses reach 75% of the tolerance. What is the most appropriate conclusion?

Losses of USD 31 million are 77.5% of the USD 40 million tolerance, which exceeds the 75% escalation trigger. The risk committee should be informed, but the tolerance itself is not breached, so no limit increase or halting of activities is warranted.

1. ALosses are at 77.5% of the tolerance, so the escalation trigger has been breached and the risk committee should be informed, although the tolerance itself has not been breachedCorrect
2. BLosses are at 72.5% of the tolerance, so no escalation is required yet
3. CLosses are at 77.5% of the tolerance, so the tolerance is breached and the board must approve a higher limit
4. DLosses are at 129% of the tolerance, so the bank is in breach and must halt activities