FRM Part II · FRM Exam Part II · Risk Mitigation
A bank's payments unit has identified that a manual reconciliation process produces frequent errors, each of small value. Management decides to automate the process and add system validation checks, with the aim of lowering the number of errors without changing the underlying business activity. Which risk response does this best represent?
This is risk reduction through control enhancement. Automation and validation checks cut the frequency of errors while the bank keeps performing the activity. Avoidance would mean stopping the process, transfer would pass losses to another party such as an insurer, and acceptance would mean taking no further action.
- ARisk avoidance
- BRisk reduction through control enhancementCorrect
- CRisk transfer
- DRisk acceptance
Explanation
Automating the process and adding validation checks lowers the frequency of errors while the activity continues. That is risk reduction through improved controls. Avoidance would require exiting the activity, transfer would shift the loss to a third party, and acceptance would mean no action.
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