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

After a scandal, a bank's board finds that the risk officer reported to the head of trading, who set the officer's pay, and that warnings about limit breaches were never escalated to the board. Which remedy best addresses the root governance failure?

Give the chief risk officer independence, with a direct reporting line to the board risk committee and authority to escalate limit breaches. This removes the conflict of reporting to the business being monitored and ensures warnings reach the board promptly.

  1. AGive the chief risk officer independence with a direct reporting line to the board's risk committee and authority to escalate limit breachesCorrect
  2. BRaise trading limits to avoid frequent breaches
  3. CReplace the risk officer with a more senior trader who reports to head of trading
  4. DPublish breaches only in the annual report

Explanation

The root failure is lack of independence and escalation. A CRO reporting to the board risk committee, with pay not set by the business, can challenge traders and escalate. Raising limits hides breaches, a trader-led risk role keeps the conflict, and annual disclosure is too slow.

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