Chapter 3

Question 1

What is operational risk appetite?

Answer 1

The amount and type of risk an organization is willing to accept in pursuit of its business objectives

Question 2

How can operational risk appetite be expressed?

Answer 2

Through qualitative statements and quantitative metrics

Question 3

What is the purpose of an operational risk appetite statement?

Answer 3

To articulate the organization’s tolerance for risk in pursuit of strategic objectives

Question 4

What is the difference between risk appetite and risk tolerance?

Answer 4

Risk appetite is the overall risk willingness, while risk tolerance specifies acceptable variation in risk outcomes

Question 5

What is risk capacity?

Answer 5

The maximum level of risk an organization can absorb without jeopardizing its survival.

Question 6

What are key principles of an effective risk appetite framework?

Answer 6

Alignment with strategy, clear communication, monitoring, and reporting mechanisms.

Question 7

What is the role of the governing body in risk appetite?

Answer 7

To ensure an appropriate framework is in place and aligned with the organization’s objectives.

Question 8

How is operational risk appetite related to risk culture?

Answer 8

It shapes decision-making and attitudes towards risk across the organization

Question 9

What is the importance of monitoring operational risk in relation to appetite?

Answer 9

To ensure risks remain within acceptable levels and to take action when thresholds are exceeded

Question 10

What actions can be taken if operational risk appetite is exceeded?

Answer 10

Mitigate/avoid risks, accept the breach, or implement intermediate management actions

Question 11

How often should operational risk appetite be reviewed?

Answer 11

Regularly, to ensure it remains aligned with the organization’s strategy and external environment.

Question 12

Provide a quantitative expression of operational risk appetite example?

Answer 12

Loss tolerances or risk exposure limits

Question 13

Provide a qualitative expression of operational risk appetite example?

Answer 13

Descriptions of acceptable risk scenarios or management approaches.

Question 14

What are operational risk appetite statements?

Answer 14

Documents that communicate acceptable levels of risk to stakeholders.

Question 15

What role does the Chief Risk Officer (CRO) play in operational risk appetite?

Answer 15

Central in designing the framework and ensuring consistency with other risk types.

Question 16

How would you express operational risk appetite qualitatively?

Answer 16

Through scenarios, attitudes, or approaches to risk management

Question 17

How would you express operational risk appetite quantitatively?

Answer 17

Using specific metrics like Value at Risk (VaR) or loss thresholds.

Question 18

How does operational risk appetite influence decision-making?

Answer 18

By defining the boundaries of acceptable risk-taking.

Question 19

What is the role of internal audit in operational risk appetite?

Answer 19

Provides assurance on the design, implementation, and reporting of the framework

Question 20

What is involved in setting operational risk appetite?

Answer 20

Determining acceptable risk levels based on strategic objectives and risk capacity.

Question 21

What are challenges in aggregating operational risk data for reporting?

Answer 21

Different risk levels across the organization and ensuring meaningful aggregation

Question 22

Impact of operational risk appetite on risk culture?

Answer 22

Defines acceptable risk behaviours and influences organizational attitudes towards risk

Question 23

Provide examples of quantitative expressions of operational risk appetite?

Answer 23

Loss tolerances, risk exposure limits, VaR models

Question 24

Provide examples of qualitative expressions of operational risk appetite?

Answer 24

Risk management approaches, scenario descriptions, attitude towards risk-taking.

Question 25

What is the importance of communicating operational risk appetite?

Answer 25

Ensures that decision-makers align their actions with the organization’s risk tolerance.

Question 26

What is the Relationship between operational risk appetite and strategic objectives?

Answer 26

Risk appetite must align with and support the achievement of strategic goals

Question 27

What metrics are used to monitor operational risk appetite?

Answer 27

Operational risk event data and risk and control indicators

Question 28

What is the role of business unit management in operational risk appetite?

Answer 28

To align decisions with the firm’s appetite and report risk data timely.

Question 29

How do external stakeholders influence operational risk appetite?

Answer 29

Their expectations help shape the organization’s risk tolerance and reporting

Question 30

Explain the dynamic nature of operational risk appetite?

Answer 30

It requires regular reviews and adjustments in response to internal and external changes.