Skip to content

FRM Part II · FRM Exam Part II · Credit Risk Management

A bank's credit risk committee reviews its governance structure. Which arrangement best reflects the principle of independence in credit risk governance under the three lines of defense model?

The best arrangement is an independent credit risk function that approves ratings and limits separately from loan originators and reports to the chief risk officer. This separates risk-taking from risk oversight, avoiding conflicts of interest that arise when business lines or audit influence ratings or model design.

  1. AThe relationship managers who originate loans also approve the internal ratings assigned to those borrowers
  2. BThe credit risk function reports to the head of lending so that approvals and risk views are aligned
  3. CInternal audit designs the rating models and then independently validates them
  4. DThe credit risk function approves ratings and limits independently of the business units that originate loans, with a reporting line to the chief risk officerCorrect

Explanation

Independence requires that those who take credit risk are separated from those who measure, approve and challenge it. A credit risk function reporting to the CRO provides second-line oversight. Letting originators set ratings or the credit function report to lending creates conflicts of interest, and internal audit designing models would compromise its third-line independence.

Did you get it right without looking?

One question tells you little. A timed set on Credit Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise Credit Risk ManagementFree diagnostic mock

More Credit Risk Management questions