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FRM Part I · FRM Exam Part I · The Governance of Risk Management

A bank's risk appetite statement allows total economic capital usage of up to USD 600 million. Business unit allocations are: Retail USD 220 million, Corporate USD 260 million, Markets USD 180 million. The board wants to keep a 10% buffer of the total appetite unallocated. Which statement is correct?

Allocations sum to USD 660 million. Keeping a 10% buffer leaves only USD 540 million allocable from the USD 600 million appetite, so the allocations exceed the permitted amount by USD 120 million. Comparing against USD 600 million alone ignores the buffer and understates the breach.

  1. AThe allocations are consistent with the buffer, with USD 60 million remaining unallocated
  2. BThe allocations exceed the appetite by USD 60 million
  3. CThe allocations total USD 660 million, which exceeds the USD 540 million allowable after the buffer by USD 120 millionCorrect
  4. DThe allocations total USD 660 million, which exceeds the USD 600 million appetite by USD 60 million but not the buffered amount

Explanation

Allocations: 220 + 260 + 180 = 660. With a 10% buffer, allocable capital is 0.90 × 600 = 540. Excess = 660 − 540 = USD 120 million. Option B notes only the excess over 600 and ignores the buffer; option D wrongly says the buffered limit is not exceeded, and A miscomputes the total.

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