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FRM Part II · FRM Exam Part II · Integrated Risk Management

A bank's chief risk officer reports directly to the CEO only and the risk committee of the board meets annually. An external review finds that the risk function's budget and the CRO's appointment are controlled by the head of the largest business line. Which governance weakness is most significant?

The most significant weakness is the lack of independence of the risk function. When a business-line head controls the CRO's appointment and budget, the risk function cannot provide credible, effective challenge to risk-taking, and direct access to the board risk committee is also limited.

  1. AInsufficient independence of the risk function, undermining effective challengeCorrect
  2. BExcessive use of quantitative risk indicators
  3. CToo many board-level committees
  4. DOverly conservative risk appetite

Explanation

If a business head controls the CRO's appointment and budget, the second line cannot credibly challenge the first line. Independence, with direct access to the board risk committee, is a core governance principle. The other options are not indicated by the facts.

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