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FRM Part II · FRM Exam Part II · Introduction to Operational Risk and Resilience

A bank's risk appetite statement for operational risk sets a tolerance that annual operational losses must not exceed USD 40 million. Which design feature would make this statement most effective in the framework?

The statement is most effective when cascaded into business-unit limits and key risk indicators with escalation triggers, and monitored and reported to the board. Static, purely qualitative or zero-loss statements are unworkable, and monitoring belongs to the first and second lines, not internal audit.

  1. ASetting it once and never revisiting it, to preserve consistency
  2. BCascading it into business-unit limits and KRIs with escalation triggers that are monitored and reported to the boardCorrect
  3. CExpressing it only qualitatively, as a commitment to avoid all losses
  4. DMaking it the sole responsibility of internal audit to monitor

Explanation

An effective appetite statement is translated into measurable limits and indicators at business level, with escalation and board reporting. A zero-loss aim is unrealistic for operational risk, static statements become stale, and monitoring is a first/second-line responsibility, not internal audit's.

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