FRM Part II · FRM Exam Part II · Governance
A bank's chief risk officer (CRO) proposes the following reporting line: the CRO reports to the CFO, can be dismissed by the CFO alone, and has no direct access to the board risk committee. Which assessment best fits sound credit risk governance practice?
The arrangement is inadequate. A CRO needs independence, organizational stature and direct access to the board risk committee, and should not be removable by one executive alone. Reporting solely to the CFO with no board access undermines objective challenge of risk-taking.
- AAcceptable, because the CFO controls capital and so is best placed to oversee risk
- BAcceptable provided the CRO also approves the largest loans to gain business knowledge
- CUnacceptable only if the bank is listed on a stock exchange
- DInadequate, because the CRO needs sufficient independence, stature and direct board access, with removal subject to board approvalCorrect
Explanation
Sound practice requires the risk function head to have independence from business lines and finance-driven pressures, direct access to the board or its risk committee, and removal only with board involvement. Combining approval duties with oversight adds conflict, and listing status is irrelevant.
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