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FRM Part II · FRM Exam Part II · Risk Governance

A bank wants to strengthen governance of its three lines of defense. Which proposal best preserves the independence of each line while ensuring effective challenge?

The best proposal gives the CRO direct access to the board risk committee and has internal audit report functionally to the audit committee, with neither tied to business revenue. This preserves independence and allows effective challenge of the first line.

  1. AThe chief risk officer reports to the head of the largest business line, and internal audit reports to the CFO
  2. BThe chief risk officer has direct access to the board risk committee, and internal audit reports functionally to the audit committee, with both free from business revenue targetsCorrect
  3. CSecond-line staff are compensated primarily on the profit of the businesses they oversee, and internal audit staff rotate into first-line roles every year
  4. DThe first line self-assesses controls and the second line accepts the results without testing

Explanation

Independence requires that second- and third-line functions have direct board-level access, stature and compensation not tied to business revenue. Reporting to a business head or CFO, profit-linked pay, or blind acceptance of self-assessments all weaken challenge. Only the second option keeps both oversight lines independent.

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