Financial Risk Manager Part 2
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In the context of financial risk management, banks often establish impact tolerances as part of their operational resilience strategies. These tolerances define the maximum level of disruption the bank can withstand in its critical business services without causing severe harm to its operations, clients, or broader financial system. What is one potential benefit for a bank in establishing such an impact tolerance?
In the context of financial risk management, banks often establish impact tolerances as part of their operational resilience strategies. These tolerances define the maximum level of disruption the bank can withstand in its critical business services without causing severe harm to its operations, clients, or broader financial system. What is one potential benefit for a bank in establishing such an impact tolerance?
Explanation:
An impact tolerance quantifies the amount of disruption that could be tolerated by the bank in the event of a severe but plausible incident. By setting an impact tolerance, the firm is identifying its most crucial operational processes and can then allocate its resources towards these processes with the goal of remaining within the impact tolerance range. Firms should consider the chain of activities which make up the important business service, from taking on an obligation to delivery of the service and determine those parts of the chain that are critical to delivery of the important business service. The PRA expects that the critical parts of the chain should be operationally resilient, and that firms should focus their work on the resources necessary to deliver them. This approach helps the bank optimize its allocation of resources to its most important business services, which is why option C is the correct answer.