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

A bank's chief risk officer (CRO) currently reports solely to the chief executive officer, and the head of a profitable trading desk has recently pressured the CRO to relax a limit. Which governance change would best strengthen the CRO's independence?

The CRO's independence is best strengthened by a direct reporting line to the board risk committee, with the board involved in appointing, removing and compensating the CRO. Tying pay to desk profits or embedding the CRO in the business would create conflicts of interest and weaken oversight.

  1. ATie the CRO's bonus mainly to the trading desk's profitability so interests are aligned
  2. BGive the CRO a direct reporting line to the board's risk committee, with board involvement in appointment and removalCorrect
  3. CMove the CRO into the business line to improve understanding of the desk's strategy
  4. DHave the CRO's compensation set by the head of the trading desk

Explanation

Independence is strengthened by a direct line to the board risk committee and board control over the CRO's appointment, removal and pay. Linking pay to desk profit or placing the CRO under the business creates conflicts of interest, the opposite of independence.

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