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FRM Part II · FRM Exam Part II · Integrated Risk Management

After a failure, a bank evaluates its three lines of defense. The first line (a lending desk) approved loans outside appetite and self-reported compliant. The second line accepted the desk's attestations without testing. Internal audit's last review of the area was four years ago. Which set of remedies best addresses the root causes?

The best remedy restores each line's proper role: the first line owns and evidences appetite adherence, the second line independently challenges and tests, and internal audit raises risk-based coverage. Shifting origination or approval to control functions would compromise independence, and removing testing would worsen the missing challenge.

  1. ARequire the first line to own and evidence risk-appetite adherence, have the second line perform independent challenge and testing, and have audit increase risk-based coverageCorrect
  2. BTransfer risk-appetite ownership to internal audit so that it can approve loans
  3. CRemove the second line's testing role to avoid duplicating the first line's work
  4. DHave the second line take over loan origination so that it controls the risk directly

Explanation

Each line failed in its own role: the first line owned risk poorly, the second line did not challenge, and the third line under-covered. Remedies must restore each role. Giving audit approval authority or the second line origination destroys independence, and removing testing worsens the lack of challenge.

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