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

A trading desk head at a bank is evaluated and paid mainly on the desk's annual profit. The desk's risk limits are set and monitored by a risk team that reports to the desk head. Which governance weakness is MOST directly illustrated?

The weakness is a lack of independence of the second line. When the risk team reports to the desk head whose pay depends on profit, limit-setting and monitoring can be influenced by profit motives, so oversight is compromised. Effective governance has risk management report independently, typically to the CRO.

  1. ALack of independence of the second line from the first lineCorrect
  2. BExcessive board involvement in setting risk appetite
  3. COverlap between internal audit and compliance duties
  4. DFailure to use stress testing in the capital plan

Explanation

Risk monitoring that reports to the business it monitors lacks independence and can be overridden by profit incentives. The scenario says nothing about board involvement, audit overlap or stress testing, so B, C and D are not indicated.

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