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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 and her compensation is set by the CFO based on firm profitability. Which change would most strengthen the independence of the CRO role in line with good governance practice?

The CRO should report directly to the CEO and the board risk committee, with compensation not driven mainly by short-term profit. This gives independence from risk-taking units and ensures risk concerns reach the board, whereas running a desk or sitting under the CFO compromises objectivity.

  1. AHave the CRO report directly to the CEO and the board risk committee, with compensation not tied mainly to short-term profitCorrect
  2. BHave the CRO also head the largest trading desk so she understands the risks first-hand
  3. CMove the CRO into the internal audit function so she becomes the third line
  4. DKeep the reporting line to the CFO but add a quarterly risk newsletter

Explanation

Independence needs a direct line to the CEO and board risk committee and pay that does not reward risk-taking profit. Heading a trading desk creates a conflict of interest. Moving the CRO into audit confuses the second and third lines. A newsletter does not alter reporting or incentives.

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