FRM Part II · FRM Exam Part II · Governance
A bank's credit risk framework follows the three lines of defense model. Which of the following activities is most appropriately placed in the first line of defense?
Relationship managers who originate loans and own the resulting credit risk sit in the first line of defense. The first line takes and manages risk daily, while independent risk management is the second line and internal audit is the third.
- ARelationship managers in the corporate lending business owning and managing the credit risks they originateCorrect
- BThe independent credit risk function setting risk appetite limits and challenging business decisions
- CInternal audit testing the effectiveness of credit controls
- DThe board risk committee approving the risk appetite statement
Explanation
In the three lines model, business units that originate and take risk own and manage it day to day, which is the first line. Independent risk oversight and limit challenge sit in the second line, and internal audit is the third line. The board committee provides governance oversight rather than being a line of defense.
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