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FRM Part II · FRM Exam Part II · Governance

A bank is restructuring its credit governance. The proposal: (1) business units own credit risk and perform first-level controls; (2) the CRO reports to the head of lending to ensure alignment with business strategy; (3) internal audit reports to the CFO; (4) the CRO has no direct access to the board risk committee. Which combination of changes would best restore a sound three lines structure?

The best fix is to make the CRO independent of the business, reporting to the CEO with direct access to the board risk committee, and to have internal audit report functionally to the board audit committee. This preserves independence of both oversight lines while business units keep risk ownership.

  1. ACRO gets independent reporting to the CEO and direct access to the board risk committee, and internal audit reports functionally to the audit committee of the boardCorrect
  2. BCRO reports to the head of lending but gains a dotted line to the board, and audit remains under the CFO
  3. CInternal audit takes over the monitoring of limit breaches and the CRO role is eliminated
  4. DBusiness units hand ownership of credit risk to the second line, which also approves loans

Explanation

Second line independence requires the CRO to be separated from revenue-generating lines with direct board access, and the third line needs independence from management, usually via reporting to the board audit committee. Reporting to lending or the CFO undermines independence. Shifting risk ownership to the second line, or audit taking over monitoring, blurs the lines.

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