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FRM Part II · FRM Exam Part II · Risk Governance

A bank's operational risk function currently reports to the head of the consumer lending division, who also sets its budget and bonus. The board wants to strengthen the second line. Which change most directly addresses a weakness in the three lines of defense structure?

Reporting the function to the chief risk officer, with access to the board risk committee, best fixes the weakness. The second line must be independent of the businesses it oversees, and the current budget and bonus control by the lending head compromises its ability to challenge.

  1. AHave the operational risk function report to the chief risk officer with a line of access to the board risk committeeCorrect
  2. BMove the function into internal audit to improve its independence
  3. CMake the function responsible for performing all control testing in the business
  4. DAllow the lending head to continue setting its budget but add a quarterly review

Explanation

Second-line independence requires reporting outside the business lines it oversees, typically to the CRO with board access. Moving it into audit blends the second and third lines. Taking over control testing shifts ownership from the first line, and retained budget control leaves the conflict.

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