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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 to the chief financial officer (CFO) and has no direct access to the board's risk committee. Which change would most improve the governance of the risk function?

The CRO should have a direct reporting line to the board risk committee and be independent of revenue-generating units. This gives the risk function stature and the ability to escalate concerns. The alternatives create conflicts of interest by linking risk oversight to business profits.

  1. AGive the CRO a direct reporting line to the board risk committee and independence from revenue-generating unitsCorrect
  2. BMake the CRO's bonus depend mainly on the trading desks' profits
  3. CMove the CRO's team into the front office to be closer to the business
  4. DHave the CRO report only to the head of the largest business line

Explanation

Effective governance requires the CRO to have stature, independence and direct access to the board or its risk committee. Tying pay to profits, embedding in the front office, or reporting to a business head all create conflicts of interest and weaken independence.

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