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

A firm's board has approved a risk appetite statement. A risk committee reviewer finds that the statement has only a qualitative description of acceptable risk, while business units use their own differing limits that are never aggregated to firm level. Which remedy best addresses the deficiency?

The best remedy is to convert the appetite into quantitative firm-wide metrics, cascade consistent limits down to business units, and aggregate reporting to the board. Dropping unit limits, delegating appetite to unit heads, or using only a capital ratio would not fix the fragmentation.

  1. ATranslate the appetite into quantitative firm-wide metrics and cascade consistent limits to business units, with aggregated reporting to the boardCorrect
  2. BEliminate limits at the business unit level and rely on firm-wide VaR alone
  3. CDelegate the appetite statement entirely to each business unit head
  4. DReplace the appetite statement with a regulatory capital ratio only

Explanation

An effective framework links the board-approved appetite to measurable firm-level metrics and consistent limits cascaded to units, with aggregated reporting. Removing unit limits loses control, delegating to unit heads fragments the appetite, and a single capital ratio ignores other risk dimensions.

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