FRM Part II · FRM Exam Part II · Risk Governance
At a mid-sized bank, the head of the retail lending business appoints a team inside the business unit to identify, assess and manage the credit and operational risks of new loan products day to day. Under the three lines of defense model, which line does this team represent?
The team is part of the first line of defense. The first line consists of the business units that own and manage risk in their daily activities. Because the team sits within and reports to the business unit, it is not independent oversight, which is what second and third lines provide.
- AFirst line, because it owns and manages risk within the business activityCorrect
- BSecond line, because it assesses risks in a specialist capacity
- CThird line, because it reviews processes inside the unit
- DSecond line, because it reports to the head of the business unit
Explanation
In the three lines model, business management owns and manages risks arising from its activities, which is the first line. A team embedded in and reporting to the business unit performs that ownership role. Reporting to the business head does not make it independent oversight, so the second-line option is wrong.
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