FRM Part II · FRM Exam Part II · Governance
A bank's board wants to strengthen its credit risk governance. Under the widely accepted three lines of defence model, which function is primarily responsible for independently challenging the credit risk profile and monitoring compliance with risk limits, without owning the origination of loans?
The independent credit risk management function, the second line of defence, challenges the risk profile and monitors limit compliance. The business line owns risk taking, while internal audit provides periodic assurance on the framework rather than day-to-day limit monitoring.
- AThe business line originating the loans
- BThe independent credit risk management functionCorrect
- CThe internal audit function
- DThe external auditor
Explanation
In the three lines model, business units own and take risk (first line), the independent risk function sets frameworks, monitors limits and challenges (second line), and internal audit gives independent assurance (third line). Internal audit does not routinely monitor limits; it assures the effectiveness of the overall framework.
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