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

A review of a failed institution finds the following: (i) the board contained several members with extensive trading experience but none with risk management expertise; (ii) the risk committee met twice a year; (iii) the CRO's budget was set by the head of the largest business line; (iv) risk reports to the board used only VaR at 99% and no stress scenarios. Which single change would best address the problem that links items (ii) and (iv) while respecting the board's oversight role?

The board risk committee should meet more frequently and receive reports that add stress testing and forward-looking scenario analysis to VaR. This directly tackles both infrequent oversight and the narrow reliance on one backward-looking metric, while keeping oversight with the board.

  1. AHave the board risk committee meet more often and require reports that include stress testing and forward-looking scenario analysis alongside VaRCorrect
  2. BMove the CRO's budget under the head of the largest business line to improve cooperation
  3. CDelegate all risk oversight to the CEO so that decisions can be made faster
  4. DReplace VaR with a single point estimate of expected loss

Explanation

Items (ii) and (iv) concern infrequent oversight and narrow, backward-looking metrics. More frequent committee meetings with stress and scenario analysis address both. Option B worsens item (iii), C removes board oversight, and D reduces information further.

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