FRM Part II · FRM Exam Part II · Governance
A bank's chief risk officer (CRO) currently reports to the chief financial officer and has no direct access to the board risk committee. The CEO argues that this is efficient because the CFO already monitors capital. Which assessment best reflects sound credit risk governance?
The arrangement is inadequate. A CRO needs stature, independence and direct access to the board or its risk committee, and should not be subordinated to a function with competing financial objectives. Reporting to internal audit would be equally wrong, since it would undermine audit's independence.
- AAcceptable, since capital and credit risk are tightly linked and the CFO is accountable for both
- BAcceptable if the CRO attends board meetings once a year
- CInadequate; the CRO should have sufficient stature and independence, including direct access to the board or its risk committee, and should not be subordinated to a function with competing profit or reporting objectivesCorrect
- DInadequate only because the CRO should report to the head of internal audit
Explanation
Sound governance gives the CRO independence, stature and direct board access, with removal subject to board involvement. Reporting through the CFO risks filtering and conflicts with financial targets. Reporting to internal audit would compromise audit independence, so that option is also wrong.
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