Chapter 3 Flashcards
What is operational risk appetite?
The amount and type of risk an organization is willing to accept in pursuit of its business objectives
How can operational risk appetite be expressed?
Through qualitative statements and quantitative metrics
What is the purpose of an operational risk appetite statement?
To articulate the organization’s tolerance for risk in pursuit of strategic objectives
What is the difference between risk appetite and risk tolerance?
Risk appetite is the overall risk willingness, while risk tolerance specifies acceptable variation in risk outcomes
What is risk capacity?
The maximum level of risk an organization can absorb without jeopardizing its survival.
What are key principles of an effective risk appetite framework?
Alignment with strategy, clear communication, monitoring, and reporting mechanisms.
What is the role of the governing body in risk appetite?
To ensure an appropriate framework is in place and aligned with the organization’s objectives.
How is operational risk appetite related to risk culture?
It shapes decision-making and attitudes towards risk across the organization
What is the importance of monitoring operational risk in relation to appetite?
To ensure risks remain within acceptable levels and to take action when thresholds are exceeded
What actions can be taken if operational risk appetite is exceeded?
Mitigate/avoid risks, accept the breach, or implement intermediate management actions
How often should operational risk appetite be reviewed?
Regularly, to ensure it remains aligned with the organization’s strategy and external environment.
Provide a quantitative expression of operational risk appetite example?
Loss tolerances or risk exposure limits
Provide a qualitative expression of operational risk appetite example?
Descriptions of acceptable risk scenarios or management approaches.
What are operational risk appetite statements?
Documents that communicate acceptable levels of risk to stakeholders.
What role does the Chief Risk Officer (CRO) play in operational risk appetite?
Central in designing the framework and ensuring consistency with other risk types.
How would you express operational risk appetite qualitatively?
Through scenarios, attitudes, or approaches to risk management
How would you express operational risk appetite quantitatively?
Using specific metrics like Value at Risk (VaR) or loss thresholds.
How does operational risk appetite influence decision-making?
By defining the boundaries of acceptable risk-taking.
What is the role of internal audit in operational risk appetite?
Provides assurance on the design, implementation, and reporting of the framework
What is involved in setting operational risk appetite?
Determining acceptable risk levels based on strategic objectives and risk capacity.
What are challenges in aggregating operational risk data for reporting?
Different risk levels across the organization and ensuring meaningful aggregation
Impact of operational risk appetite on risk culture?
Defines acceptable risk behaviours and influences organizational attitudes towards risk
Provide examples of quantitative expressions of operational risk appetite?
Loss tolerances, risk exposure limits, VaR models
Provide examples of qualitative expressions of operational risk appetite?
Risk management approaches, scenario descriptions, attitude towards risk-taking.
What is the importance of communicating operational risk appetite?
Ensures that decision-makers align their actions with the organization’s risk tolerance.
What is the Relationship between operational risk appetite and strategic objectives?
Risk appetite must align with and support the achievement of strategic goals
What metrics are used to monitor operational risk appetite?
Operational risk event data and risk and control indicators
What is the role of business unit management in operational risk appetite?
To align decisions with the firm’s appetite and report risk data timely.
How do external stakeholders influence operational risk appetite?
Their expectations help shape the organization’s risk tolerance and reporting
Explain the dynamic nature of operational risk appetite?
It requires regular reviews and adjustments in response to internal and external changes.
