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Properly transmitting the RAF within the firm together with incorporating the
RAF into making day-to-day operating decisions.
The common view that risk appetite is mainly about setting limits.
The lack of connection between risk appetite and the strategic and business
planning processes.
Aggregation of risks at the group level and then down to the individual
business units.
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Educating employees who must comply with risk limits. Those employees
should understand the background and reasons for the limits.
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Step 1: Establish either a complete risk appetite statement from the board or
some fundamental risk parameters for the individual business units to
consider.
Step 2: The output from the business unit is either a divisional risk appetite
statement or the communication of a risk posture.
Step 3: Risk aggregation of all the business units in terms of the business and
budget plans to be compared with the firms overall risk appetite.
Step 4: Relevant changes are made to the business unit plans or even the
firms overall risk appetite.
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The Role of Stress Testing with an RAF as well as Challenges in Firmwide Risk Aggregation
Example
1.
B.
C.
The educating and training of top management on the details of the RAF.
D.
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Example
1. Answer
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Example
2.
You are a member of the senior management team at a bank where you have
spent a significant amount of time assisting with the development of a risk
appetite framework (RAF). With regard to the RAF, which of the following
recommendations would you most likely be willing to make?
I.
II.
A.
I only.
B.
II only.
C.
D.
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Example
2. Answer
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Example
3.
Which of the following statements regarding stress testing and firm-wide risk
aggregation is most accurate?
A.
B.
In the context of risk aggregation, stress tests are considered a more reliable
alternative than regulatory and economic capital measures.
C.
D.
Using the results of stress testing, those scenarios that will result in minimal
losses with a very low likelihood of occurrence may be ignored when
considering any adjustments to risk appetite.
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Example
3. Answer
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Example
4.
The process concludes with making any needed changes to the business unit
plans.
B.
C.
The process begins with either a divisional risk appetite statement or the
communication of a risk posture from each of the divisions within the firm.
D.
The process will differ depending on whether the firms planning process is
top down from the board/senior management or bottom up from the
business unit managers.
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Example
4. Answer
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FRM
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