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FRM Part II · FRM Exam Part II · Governance

A mid-sized bank is redesigning governance. Proposal 1: the chief risk officer reports to the CFO and has no direct board access. Proposal 2: the CRO reports to the CEO with direct, unrestricted access to the board risk committee, and the CRO's removal requires board committee approval. Proposal 3: the head of internal audit also serves as CRO. Proposal 4: first-line managers set the risk function's budget. Which proposal best supports the effectiveness of the three lines model?

Proposal 2 is best: the CRO has direct access to the board risk committee and cannot be removed without its approval, which secures independence and escalation. The other proposals restrict access, merge second and third lines, or let the first line control the risk function's budget.

  1. AProposal 2Correct
  2. BProposal 1
  3. CProposal 3
  4. DProposal 4

Explanation

Independence of the second line is supported by direct board access and protection from removal without board oversight. Proposal 1 limits escalation, Proposal 3 merges the second and third lines and breaks audit independence, and Proposal 4 gives the first line control over its overseer.

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