FRM Part II · FRM Exam Part II · Risk Governance
A firm's risk appetite statement contains only a qualitative sentence stating that the firm has 'low tolerance for operational failures.' Which weakness is most directly created by this design?
A purely qualitative appetite statement lacks measurable thresholds, so breaches cannot be objectively detected and business units cannot convert it into limits or key risk indicators. Good frameworks pair qualitative statements with quantitative metrics so that monitoring and escalation are consistent and enforceable.
- AThe statement is too conservative for the regulators to approve
- BWithout quantitative metrics and thresholds, the statement cannot be monitored, breaches cannot be objectively identified, and business units cannot translate it into limitsCorrect
- CThe board is unable to delegate any responsibility to the chief risk officer
- DThe firm cannot use scenario analysis in its risk assessment
Explanation
Effective appetite statements combine qualitative statements with quantitative measures such as loss thresholds or KRI limits. A purely qualitative statement is hard to measure and enforce. The other options describe consequences that do not follow from the design.
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