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FRM Part II · FRM Exam Part II · Risk, Regulation and Organizational Structure

A bank's board receives risk reports that are produced entirely by the trading desk heads, aggregated in the desk's own spreadsheets, and presented without challenge from the CRO. Which governance weakness is most directly illustrated?

The weakness is the lack of independent information flow to the board. Reports prepared by the very desks being overseen, using uncontrolled spreadsheets and without CRO challenge, can be biased or wrong, so the board cannot exercise effective oversight of the bank's risk profile.

  1. AExcessive diversification of the board's membership
  2. BLack of independent information flow to the board, with reliance on self-reported dataCorrect
  3. COverly frequent rebalancing of the trading book
  4. DInsufficient use of leverage by the desks

Explanation

Effective board oversight needs risk information that is independent, reconciled and challenged by a risk function not dependent on the business line. Desk-produced reports in unvalidated spreadsheets with no CRO challenge expose the board to biased or erroneous information. The other options do not describe the problem.

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