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FRM Part II · FRM Exam Part II · Risk Capital Attribution and Risk-Adjusted Performance Measurement

A bank allocates capital to business lines using a single firm-wide model, but front-office heads dispute the figures and managers manipulate positions near measurement dates. Which practice best addresses this implementation issue?

The best approach is a transparent, consistently applied attribution methodology under independent governance and review, with incentives tied to risk-adjusted performance. This builds business-line acceptance and limits gaming, whereas unit-chosen methods or abandoning attribution undermine comparability and risk discipline.

  1. ARemove capital attribution from performance evaluation entirely
  2. BAllocate capital using only regulatory capital to avoid disputes
  3. CEstablish transparent, consistently applied attribution methodology with independent governance and review, and align incentives with risk-adjusted metricsCorrect
  4. DAllow each business line to choose its own preferred allocation method

Explanation

Credible attribution needs transparent, consistent methods and independent oversight so business lines accept results and gaming is limited. Letting units choose methods undermines comparability, and removing attribution forfeits risk-adjusted discipline. Regulatory capital alone ignores economic risk differences.

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