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FRM Part I · FRM Exam Part I · The Governance of Risk Management

A bank's risk appetite statement sets a limit on tail losses, but the trading desk repeatedly exceeds it. Management grants informal exceptions because the desk is highly profitable, and the board is not told. Which governance failure does this most clearly illustrate?

This illustrates a weak risk culture. Limits derived from the risk appetite were breached repeatedly, exceptions were granted informally because of profitability, and the board was not informed. Effective governance requires enforcing limits and escalating breaches regardless of how profitable the desk is.

  1. AExcessive reliance on external credit ratings
  2. BA weak risk culture in which limits are not enforced and breaches are not escalatedCorrect
  3. CInadequate capital buffers relative to regulatory minimums
  4. DOverly conservative model validation

Explanation

The key facts are repeated limit breaches, informal exceptions justified by profit, and no escalation to the board. These indicate a weak risk culture and ineffective enforcement of the risk appetite. Nothing in the facts concerns ratings, capital levels or model validation.

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