Skip to content

FRM Part I · FRM Exam Part I · Learning From Financial Disasters

Across several well-known financial disasters such as Barings, Orange County and LTCM, which governance lesson is most consistently drawn?

Boards and senior management must understand the risks being taken and keep independent oversight and controls over risk-taking. Many disasters involved unchecked individuals, poorly understood complex positions and weak challenge, so governance and independent monitoring are the consistent lesson rather than reliance on one model.

  1. ARisk is best managed by relying solely on a single quantitative model such as VaR
  2. BSenior management and boards must understand the risks being taken and maintain independent oversight of risk-taking activitiesCorrect
  3. CDiversifying across more trading desks eliminates the need for limits
  4. DStrong recent profits justify relaxing limits on the responsible traders

Explanation

Recurring lessons include weak oversight, unclear understanding of complex positions, and inadequate independent controls. Relying on one model, abandoning limits, or rewarding profits without scrutiny worsens these failures rather than preventing them.

Did you get it right without looking?

One question tells you little. A timed set on Learning From Financial Disasters shows your real accuracy, how long you take and where you lose marks.

Practise Learning From Financial DisastersFree diagnostic mock

More Learning From Financial Disasters questions