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CFA Level I · CFA Level I Exam · Introduction to Risk Management

A bank's risk report shows that a trading desk's exposures have repeatedly exceeded its approved limits, but management has not responded. Which weakness in the risk management framework does this most likely indicate?

The situation most likely indicates poor risk governance. Exposures were measured and reported, so identification and measurement functioned, but management took no action on repeated limit breaches. Effective governance requires enforcing limits and escalating breaches, which is the missing element here.

  1. AInadequate risk identification of new products
  2. BPoor risk governance, with no effective action on limit breachesCorrect
  3. CAn overly conservative risk tolerance statement

Explanation

The exposures were measured and reported, so identification and measurement worked. The failure is that governance did not enforce limits or act on breaches. Nothing suggests the risk tolerance is too conservative; repeated breaches point to weak enforcement.

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