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Operational Risk > Chapter 5: Risk Appetite > Flashcards

Chapter 5: Risk Appetite Flashcards

1
Q

What is risk appetite?

A

The amount of risk an organization is ready to take in pursuit of its strategic objectives.

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2
Q

Since when has the concept of risk appetite been included in corporate governance codes?

A

Since the 1990s.

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3
Q

Who is responsible for ensuring that a firm operates within its risk appetite?

A

The board.

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4
Q

What significant event increased attention to the concept of risk appetite?

A

The financial crisis of 2008.

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5
Q

What does defining a risk appetite involve?

A

Assessing possible risks, establishing boundaries for acceptable and unacceptable incidents, and creating necessary controls.

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6
Q

What is a common alternative term for ‘risk appetite’?

A

Risk tolerance.

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7
Q

Why do some organizations dread defining risk appetite?

A

It may uncover inner contradictions between what is officially stated and what is happening in reality.

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8
Q

What is the role of the risk function in relation to risk appetite?

A

To provide conceptual and methodological assistance to define risk appetite and monitor risk exposure.

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9
Q

True or False: Operational risks are perceived as purely downside risks.

A

True.

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10
Q

What is the relationship between risk and reward in investment portfolios?

A

The bigger the volatility, the larger the possible upside and downside.

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11
Q

What are the two types of risks that have well-defined returns?

A
  • Credit risk
  • Market risk
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12
Q

What is often ignored by financial firms regarding operational risk?

A

The revenues generated by operational risk.

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13
Q

What are some examples of significant operational risk incidents?

A
  • Barings
  • Arthur Andersen
  • MF Global
  • Knight Capital
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14
Q

What must be balanced in operational risk management?

A

The benefits of operational risk and the potential for damage.

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15
Q

What analogy is used to describe managing risk?

A

Handling a rebellious child.

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16
Q

What is a common flaw in risk appetite statements?

A

They often express what is not wanted without specifying how to avoid those events.

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17
Q

What are the five elements of a comprehensive risk appetite framework?

A
  • Risk appetite statements
  • Risk tolerance
  • Key controls
  • Risk limits
  • Governance
18
Q

How do some firms categorize their risk appetite levels?

A
  • Averse
  • Cautious
  • Open
  • Seeker/Hungry
19
Q

What does the COSO approach suggest about risk tolerance?

A

It is the quantitative expression of risk appetite.

20
Q

What is the concept of ALARP?

A

As Low As Reasonably Practicable.

21
Q

What is essential for effective risk appetite structures?

A

Governance.

22
Q

What should monitoring tools provide management?

A

Relevant information and assurance that the business operates as it should.

23
Q

Fill in the blank: Risk appetite is often expressed through maximum ______ for events.

24
Q

What is risk appetite?

A

The amount and type of risk that an organization is willing to take in order to achieve its objectives.

25
What does ALARP stand for?
As Low As Reasonably Practicable.
26
How do large banks express their risk appetite?
Through internal controls to limit certain losses at certain probabilities of occurrence.
27
What is the difference between risk appetite statements and risk tolerance statements?
Risk appetite statements express the level of risk an organization is willing to accept, while risk tolerance statements define the specific limits of risk exposure.
28
True or False: A market infrastructure firm has a minimum appetite for failures in its core business process.
True.
29
Fill in the blank: A retail bank has ______ for intentional breaches of conduct in its sales process.
no tolerance.
30
What is the accepted threshold for isolated conduct breaches in the retail bank example?
0.2% of the sales force.
31
What does the legal and compliance risk statement aim to minimize?
Legal and compliance risks in all business operations and countries of operation.
32
What happens if there is a known deviation from rules and regulations in the example provided?
It must be escalated within five working days and resolved within 20 working days.
33
In the governance structure of risk appetite, who designates risk owners?
The organization.
34
What is the top-down approach to defining risk appetite?
Risk appetite is defined by the board and allocated to different businesses.
35
What is the bottom-up approach to defining risk appetite?
It reflects the accepted level of risk-taking in a firm based on observed business practices.
36
True or False: Comparing top-down and bottom-up risk appetite statements can reveal discrepancies.
True.
37
What are some examples of top-down statements related to risk appetite?
* The organization has no appetite for data breaches * The board will not tolerate any violation of ethics * The institution has no appetite for physical security incidents.
38
What reflects risk appetite at the board level?
The level of capital the firm holds compared to minimum regulatory requirements.
39
Fill in the blank: The risk appetite is expressed as a tolerance level for ______.
losses.
40
What is a key indicator of a firm taking too much risk?
When risk exposure exceeds the firm's capacity to absorb loss.
41
What are the top four key risk indicators for operational risk in firms?
* Aggressive profit growth targets * Under-investment in infrastructure and people * Regulatory negligence * Wishful risk appetite statements not tied to actual controls.
42
What is a potential consequence of willful blindness in risk assessment?
Excessive risk-taking.

Operational Risk (13 decks)

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