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FRM Part II · FRM Exam Part II · Risk Governance

When a board is setting operational risk appetite, which approach best reflects sound governance practice?

Good governance combines qualitative appetite statements with quantitative limits or tolerances, cascaded to business lines and monitored with escalation triggers. The board approves and reviews it; a single loss number, full delegation, or regulatory capital alone would be inadequate.

  1. ADefine appetite through qualitative statements and quantitative limits or tolerances, cascaded to business lines and monitored with escalation triggersCorrect
  2. BSet a single annual loss figure and review it only when losses exceed it
  3. CDelegate appetite entirely to the operational risk function with no board review
  4. DExpress appetite only as the regulatory capital requirement for operational risk

Explanation

Sound practice combines qualitative statements with quantitative metrics and limits, translated into business-line tolerances with escalation procedures. The board must approve and periodically review appetite. A single loss figure reviewed only after breach is reactive, and delegating fully removes board accountability.

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