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FRM Part II · FRM Exam Part II · Case Study: Financial Crime and Fraud

After a large rogue-trading fraud, a regulator fines a bank and also imposes a requirement to hold additional capital and restricts certain business activities until governance is remediated. Which statement best describes the regulatory consequences framework illustrated?

Supervisory consequences can combine fines, extra capital requirements and business restrictions. The non-financial effects, such as lost business and reputational damage, can exceed the fine itself. Capital add-ons do not replace remediation of governance and control failures.

  1. AOnly monetary fines are available to supervisors, so the capital add-on is outside their powers
  2. BCapital add-ons replace the need for remediation of governance and control failures
  3. CSupervisory consequences can combine penalties, capital measures and business restrictions, and the non-financial ones can be more damaging than the fineCorrect
  4. DBusiness restrictions apply only to firms that have been criminally convicted

Explanation

Supervisors can use fines, capital add-ons and restrictions together. Restrictions and lost franchise value often exceed the fine. Capital add-ons do not substitute for remediation, and restrictions do not require a criminal conviction.

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