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P1.T1.508. Implementation of a risk appetite framework (RAF)

Nicole Seaman

Director of FRM Operations
Staff member
Learning outcomes: Describe current best practices for the implementation and communication of RAFs. Explain the relationship between the RAF and the strategic and capital planning processes. Assess the role of stress testing within an RAF as well as challenges in firm-wide risk aggregation.


508.1. What is a risk posture?

a. A set of measurable indicators of compliance with risk management norms that can form a robust basis for promotion and remuneration
b. An public statement for external stakeholders (e.g., shareholders) that translates the risk appetite framework into non-technical language
c. A qualitative expression of whether the business unit intends to take more, less, or approximately the same amount of risk over the next planning period
d. The consensus orientation the firm takes with respect to its regulatory supervisor; for example, will the firm be highly cooperative or will it only meet legal requirements

508.2. The Institute of International Finance says about firm-wide risk aggregation, "One of the significant challenges that firms will eventually face as they proceed along the risk appetite journey is the issue of risk appetite aggregation—that being, once individual businesses have set their own risk appetite boundaries, how does an organization decide whether, in aggregate, these boundaries fit within the fim’s overall risk appetite? or, conversely, if key quantitative aspects of the group’s overall risk appetite have been determined, how can the risk appetite of individual businesses be set in such a way as to ensure alignment with the overall risk appetite in aggregate?" Which of the following statements is true about firm-wide risk aggregation?

a. Aggregation is a mature art and science with converging practices and relatively uniform regulatory role models
b. Aggregation of risk appetite should be done on both a “normal course” and stressed basis
c. Only quantifiable risks should be included in the aggregation process in order to ensure an objective outcome
d. The advantages of economic capital measures for aggregation include: easily linked to specific macroeconomic scenarios; naturally captures the liquidity dimension of risk; and is highly intuitive such that senior managers immediately engage with it

508.3. According to the Institute of international Finance, each of the following is a responsibility of either senior management or risk management EXCEPT which is inaccurate?

a. Senior management must set the tone and lead the discussion regarding risk appetite
b. Risk management staff must take ownership, and drive the development, of line-of-business risk appetites and profiles because these are primarily a means of setting limits and constraining business
c. Risk management must provide clarity of concept and definition and support in understanding the implications of the risk appetite statements and metrics as they develop
d. Risk management must provide the appropriate infrastructure and controls to support the ongoing maintenance of the RAF

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