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

A bank's board wants to assess whether its risk culture is sound. Which of the following is the best indicator that risk culture is effective in practice, rather than merely documented?

The best indicator is that staff at every level promptly escalate risk concerns even when this conflicts with revenue goals. Culture is demonstrated through behaviour and open challenge, not policy documents, absence of reported losses, or pay linked only to revenue.

  1. AThe risk policy manual has been updated and approved by the board each year
  2. BStaff at all levels escalate emerging risk concerns promptly, even when doing so conflicts with revenue targetsCorrect
  3. CThe bank has not reported any operational loss events during the past year
  4. DFront-office compensation is tied solely to annual revenue growth

Explanation

Risk culture is shown by behaviour: open communication and escalation of concerns, even against commercial pressure. Documented policies alone do not prove culture. An absence of reported losses may signal under-reporting, and revenue-only pay encourages excessive risk-taking.

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