FRM Part II · FRM Exam Part II · Risk Mitigation
A bank's payments unit identifies that a manual reconciliation step causes frequent errors. Management decides to automate the step and add system validation checks, without changing the volume of payments processed. Which risk response does this best represent?
This is risk reduction through control improvement. Automation and validation checks cut the likelihood of reconciliation errors while the bank continues the payments activity. Avoidance would mean exiting the activity, transfer would shift the loss to a third party, and acceptance would mean taking no action.
- ARisk avoidance
- BRisk reduction through control improvementCorrect
- CRisk transfer through insurance
- DRisk acceptance
Explanation
Automating the step and adding validation checks lowers the likelihood of errors while the activity continues. That is risk reduction through improved controls. Avoidance would require stopping the activity, and no risk is shifted to a third party or simply tolerated.
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