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FRM Part I · FRM Exam Part I · Operational Risk

A bank has the operational risk management function report only to the head of a major trading business, who also sets its budget. Which governance weakness does this arrangement most directly create?

Having operational risk management report to and be funded by a business head undermines its independence. It creates a conflict of interest that can weaken the function's ability to challenge the business objectively and escalate concerns. Second-line functions should be independent of the units they oversee.

  1. AExcessive independence, which reduces the function's knowledge of the business
  2. BLack of independence, which can compromise the function's ability to challenge the business objectivelyCorrect
  3. CDuplication with internal audit, since both report to the same person
  4. DFailure to apply a bottom-up approach to loss data collection

Explanation

A second-line function must be independent of the units it oversees. Reporting to and being funded by a business head creates a conflict of interest and weakens objective challenge and escalation. The other options do not follow: independence is a requirement, not a flaw, and reporting lines do not cause duplication with audit.

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