Skip to content

FRM Part I · FRM Exam Part I · The Governance of Risk Management

A bank's board is reviewing its governance after a loss. Findings: (i) the business units treat risk limits as the risk department's job; (ii) the risk function lacks authority to veto new products; (iii) internal audit reports to the head of trading. Which assessment is most accurate?

All three findings are weaknesses. Business units must own their risks as the first line, the risk function needs authority such as challenging or vetoing products, and internal audit must be independent of the businesses it audits, so reporting to the head of trading breaches that independence.

  1. AOnly finding (iii) is a weakness, because the first line has no risk role
  2. BFindings (i), (ii) and (iii) are each weaknesses: first-line ownership is missing, the second line lacks authority, and the third line lacks independenceCorrect
  3. COnly finding (ii) is a weakness, since audit independence is optional
  4. DFindings (i) and (ii) are acceptable, and only the audit reporting line needs change

Explanation

In the model the first line owns and manages risk, so (i) is a failure. The second line needs real authority, so (ii) is a weakness. Internal audit must be independent of the businesses it reviews, so reporting to trading head is a flaw. All three are weaknesses.

Did you get it right without looking?

One question tells you little. A timed set on The Governance of Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise The Governance of Risk ManagementFree diagnostic mock

More The Governance of Risk Management questions