FRM Part II · FRM Exam Part II · Governance
A bank's board is concerned that its first line treats credit risk as the risk department's problem and relies on the second line to catch issues. Which action would be most consistent with the three lines of defense model for correcting this?
The best action is to make business line heads accountable for the risks they originate, with risk-adjusted performance and pay, while the second line keeps its independent oversight role. Risk ownership belongs to the first line, so moving decisions or merging lines would blur responsibilities.
- AMove credit approval authority from business units to the risk function so that risk owns every lending decision
- BMake business line heads explicitly accountable for the risks they originate, with performance and compensation reflecting risk-adjusted outcomes, while the second line retains oversight and challengeCorrect
- CMerge the second and third lines to remove duplicated reviews of lending activity
- DReduce second-line limit setting so the business has more freedom to manage its own exposures
Explanation
The model places ownership of risk in the first line, so the remedy is to strengthen first-line accountability and incentives while keeping second-line oversight. Shifting approval to risk blurs ownership and weakens independence. Merging lines removes assurance independence, and removing limits weakens oversight.
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