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FRM Part II · FRM Exam Part II · Governance

A bank's credit portfolio manager approves a new large corporate loan, and the business unit that originated it owns the resulting credit risk. Under the three lines of defense model as applied to credit risk governance, which function is the first line of defense?

The first line of defense is the business unit that originates and manages the credit exposure, because it takes the risk and owns it day to day. Independent risk management is the second line and internal audit is the third.

  1. AThe business unit originating and managing the credit exposureCorrect
  2. BThe independent credit risk management function that sets limits
  3. CThe internal audit department that reviews the control framework
  4. DThe board risk committee that approves risk appetite

Explanation

In the three lines model, the first line consists of the business units that take and own risk and operate day-to-day controls. Independent risk management is the second line, internal audit is the third, and the board provides oversight rather than acting as a line.

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