FRM Part II · FRM Exam Part II · Risk Governance
Which practice most strongly supports the effective embedding of a board-approved risk appetite in an organization's decision making?
Appetite is embedded when it is linked to strategic planning, business-line limits, and performance and pay decisions, and reported regularly to the board. This makes appetite shape actual behavior and decisions rather than being a static document reviewed only after losses occur.
- AReviewing the appetite statement only when a major loss occurs
- BLinking appetite metrics to strategic planning, business-line limits, and performance and compensation processes, with regular reporting to the boardCorrect
- CKeeping the appetite statement confidential within the risk function to avoid influencing business behavior
- DSetting appetite solely by copying peer institutions' published statements
Explanation
Embedding requires that appetite influences strategy, limits, and incentives, and that the board receives regular reporting on adherence. Ad hoc reviews, confidentiality, and imitation of peers fail to connect appetite to the firm's own objectives or behavior.
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