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FRM Part II · FRM Exam Part II · Governance

At a regional bank, the credit risk function reports to the Chief Risk Officer and sets the credit risk limits and monitors compliance with them independently of the lending desks. Under the three lines of defense model, which line does this function represent?

The credit risk function is the second line of defense. It sets limits and independently monitors and challenges the lending desks, which sit in the first line and own the risk. Internal audit forms the third line and provides assurance over both.

  1. AFirst line, because it is closely involved in day-to-day credit decisions
  2. BSecond line, because it provides independent oversight and challenge of risk-takingCorrect
  3. CThird line, because it is independent of the business units
  4. DSecond line, because it owns and accepts the credit risk on the bank's behalf

Explanation

The second line (risk management and compliance) designs the framework, sets limits and independently monitors risk-taking by the business. The first line owns and manages risk, and the third line is internal audit, which gives independent assurance. The last option is wrong because owning the risk is a first-line responsibility.

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