medium · FRM Part 1 Foundations of Risk Management
A bank's risk capacity is defined as $1 billion. If the board sets a risk appetite of $950 million, what is the primary danger compared to an appetite of $700 million?
- A serious violation of the three lines of defense model
- A direct breach of the Modigliani-Miller capital structure theorem
- An excessive and unwarranted cost of hedging against every marginal exposure
- Insufficient buffer against unexpected losses or model errors
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