medium · FRM Part 1 Foundations of Risk Management
A bank finds that its 'Risk Appetite' is set only marginally below its 'Risk Capacity'.
According to the Risk Practitioner's Treatise, what is the primary danger of this configuration?
- The desk-level 'Risk Limits' will become too restrictive for the trading units to operate normally.
- The firm has almost no buffer against unexpected shocks, risking a breach of regulatory minima.
- The firm is being overly conservative and is failing to maximize shareholder returns as a result.
- The 'Risk Tolerance' will necessarily come to exceed the 'Risk Capacity' over time.
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