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FRM Part II · FRM Exam Part II · Integrated Risk Management

A bank's board reviews a post-mortem of a large trading loss. The investigation found that traders who exceeded limits were rarely challenged because they produced high profits, and junior staff who raised concerns were told not to slow the business. Which conclusion about risk culture is most appropriate?

The pattern of ignoring limit breaches by profitable traders and discouraging staff from raising concerns shows a weak risk culture shaped by incentives and leadership tone. The loss is not mainly a model, limit-size or market-luck problem, because the behaviors described allowed breaches to persist.

  1. AThe incentive and tone-from-the-top environment tolerated limit breaches, indicating a weak risk cultureCorrect
  2. BThe loss shows that limits were set too high and culture was not a factor
  3. CThe failure is solely a model validation issue and should be handled by the quant team
  4. DThe loss is primarily explained by unforeseeable market movements

Explanation

Tolerating breaches by profitable traders and discouraging escalation are classic signs of weak risk culture driven by incentives and leadership signals. The other options ignore the behavioral evidence described, which points to culture rather than limit calibration, models or pure bad luck.

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