Module: | MODULE B: RISK MANAGEMENT
Q346: Consider the following statements differentiating Risk Appetite and Risk Tolerance within a bank's risk management framework:
1. Risk Appetite defines the broad, high-level quantum of risk a bank is willing to accept in pursuit of its strategic objectives and profitability.
2. Risk Tolerance represents the specific, absolute maximum variance or deviation around the risk appetite that the bank can legally or operationally bear.
3. Once the Board of Directors approves the initial Risk Appetite framework, it becomes a permanent statutory document that cannot be revised for a decade.
2. Risk Tolerance represents the specific, absolute maximum variance or deviation around the risk appetite that the bank can legally or operationally bear.
3. Once the Board of Directors approves the initial Risk Appetite framework, it becomes a permanent statutory document that cannot be revised for a decade.
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: Risk Appetite is a strategic, high-level expression of the amount and type of risk a bank is willing to actively seek and retain in order to achieve its business objectives and desired return on equity.
Statement 2 is correct: Risk Tolerance (often linked to Risk Capacity) is much more specific and granular.
It defines the maximum acceptable deviation from the Risk Appetite, representing the absolute limits a bank can endure before breaching regulatory capital minimums or facing insolvency.
Statement 3 is incorrect: A Risk Appetite Statement (RAS) is a living, dynamic document.
The RBI mandates that the Board of Directors must review and update the RAS at least annually, or more frequently if there are significant changes in macroeconomic conditions or the bank's business strategy.
Statement 2 is correct: Risk Tolerance (often linked to Risk Capacity) is much more specific and granular.
It defines the maximum acceptable deviation from the Risk Appetite, representing the absolute limits a bank can endure before breaching regulatory capital minimums or facing insolvency.
Statement 3 is incorrect: A Risk Appetite Statement (RAS) is a living, dynamic document.
The RBI mandates that the Board of Directors must review and update the RAS at least annually, or more frequently if there are significant changes in macroeconomic conditions or the bank's business strategy.