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FRM Part II · FRM Exam Part II · Governance

A risk committee notices that a business unit repeatedly exceeds its risk limits, and each breach is approved retrospectively by the unit head without escalation. Which interpretation reflects the strongest governance concern?

Repeated breaches approved after the fact by the unit head show a weak risk culture: limits are not binding and escalation to independent risk oversight is bypassed. Good governance requires prompt escalation and independent review of breaches, regardless of whether a loss occurred.

  1. AThe limits are probably too tight, so they should be removed to reduce administrative burden
  2. BThis indicates a weak risk culture in which limits are not treated as binding and escalation to independent risk oversight is bypassedCorrect
  3. CRetrospective approval is a standard control that demonstrates effective first-line ownership
  4. DThe breaches matter only if they produce an actual loss

Explanation

Limits only work if breaches are escalated to independent risk functions and the board as appropriate. Self-approval by the unit head after the fact shows limits are not respected. Absence of loss does not make the process sound, and removing limits does not fix the culture.

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