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FRM Part I · FRM Exam Part I · Learning From Financial Disasters

A bank's board reviews several past disasters and wants to draw the lesson most common across them about governance. Which finding is best supported?

The best-supported lesson is that risk managers lacked independence or authority and senior management or the board failed to challenge profitable activities they did not understand. Weak governance lets risk-taking go unchecked, a pattern seen across many financial disasters.

  1. ARisk managers lacked independence or authority, and senior management did not challenge profitable but poorly understood activitiesCorrect
  2. BLosses were mainly caused by regulators requiring too much capital
  3. CRisk limits were always breached because they were set too tightly
  4. DDisasters occurred only at firms with too little trading activity

Explanation

Common governance failures include weak independence of risk functions, limited challenge by senior management or the board, and tolerance of poorly understood but profitable businesses. Tight limits and excessive capital are not recurring causes.

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