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FRM Part II · FRM Exam Part II · Risk Governance

A business unit head argues that the unit should be allowed to exceed its operational risk limit for one quarter because revenue targets are being met. According to sound risk governance practice, what is the most appropriate response?

The excess should be treated as a limit breach, escalated under the framework, and any exception approved by the designated authority and documented. Revenue success does not justify bypassing appetite limits, and quietly resetting limits or ignoring temporary breaches weakens governance.

  1. AAllow the excess automatically, since revenue performance justifies higher risk-taking
  2. BTreat the excess as a limit breach requiring escalation per the framework, with any exception approved by the designated authority and documentedCorrect
  3. CReset the limit upward permanently so the breach is no longer recorded
  4. DIgnore the breach if it is reversed before the quarterly board report

Explanation

Limits breaches must follow defined escalation and approval procedures, with documented exceptions. Revising limits to hide breaches or ignoring temporary excesses undermines the appetite framework.

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