FRM Part II · FRM Exam Part II · Governance
A bank's chief risk officer (CRO) reports to the head of the lending division and has no direct access to the board risk committee. Which assessment is most consistent with regulatory expectations for risk governance?
The arrangement is deficient. Regulatory expectations require the CRO and risk function to be independent of business lines, with sufficient stature and direct access to the board or risk committee, so risk views are not filtered or compromised by revenue-generating managers.
- AAcceptable, because the lending division best understands credit risk
- BDeficient, because the CRO needs independence from business lines and direct access to the board or its risk committeeCorrect
- CAcceptable, provided the CRO also earns a bonus tied to lending volume
- DDeficient only if the bank is listed on an exchange
Explanation
Supervisory expectations require the risk function to be independent of revenue-generating units, with a CRO of sufficient stature and unfettered access to the board. Reporting to the lending head compromises objectivity, and tying CRO pay to volume would worsen it.
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