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

A bank's business unit managers take risks and own them day to day, a independent risk management function monitors and challenges those risks, and internal audit gives independent assurance to the board on the effectiveness of both. This arrangement is best described as:

This is the three lines of defense model: business units own and manage risk as the first line, independent risk management and compliance oversee and challenge as the second line, and internal audit provides independent assurance to the board as the third line.

  1. AThe three lines of defense modelCorrect
  2. BA centralized risk-pooling model
  3. CA risk-transfer hierarchy
  4. DThe risk-adjusted return framework

Explanation

In the three lines of defense model, the first line is business units owning risk, the second line is independent risk management and compliance, and the third line is internal audit. The other terms do not describe this separation of roles.

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