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

A large bank's board approved an aggressive growth strategy but received only high-level, aggregated risk reports. After the bank suffered heavy trading losses, a review found that the chief risk officer reported to the head of trading and had no direct access to the board. Which governance reform would most directly address this specific weakness?

The best fix is to give the chief risk officer an independent reporting line to the board's risk committee. This removes the conflict created by reporting to the head of trading and lets risk concerns reach the board without filtering by the business that takes the risk.

  1. AGive the CRO an independent reporting line to the board risk committee, separate from business-line headsCorrect
  2. BLink the CRO's bonus to the trading desk's annual revenue
  3. CReplace the board risk committee with the executive management committee
  4. DReduce the frequency of risk reports so that the board focuses only on strategic issues

Explanation

The weakness is a lack of independence and board access for the risk function. An independent reporting line to the board risk committee lets the CRO escalate concerns without interference from the business lines. Tying pay to trading revenue would worsen the conflict of interest.

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