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

A bank's board risk committee reviews a report showing that a business unit repeatedly breached its VaR limit, each time receiving a retrospective approval from the unit's own head, and the CRO was informed only quarterly. Which governance weakness is the most fundamental?

The fundamental weakness is an escalation process without independent oversight: breaches are approved by the unit's own head and reach the CRO only quarterly. Effective governance requires prompt escalation to the independent risk function and board, so the model type, limit units or meeting format are secondary issues.

  1. AThe VaR model is parametric rather than based on historical simulation
  2. BThe limit-breach escalation process lacks independent oversight and timely reporting to the risk function and boardCorrect
  3. CThe unit's VaR limit is expressed in currency rather than as a percentage of capital
  4. DThe committee meets in person rather than virtually

Explanation

Breaches approved by the same business head who benefits from the risk-taking, with only delayed notice to the CRO, show that escalation and authority are not independent of the first line. Model choice, limit units and meeting format are secondary and do not explain the repeated unchecked breaches.

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