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FRM Part I · FRM Exam Part I · The Governance of Risk Management

Before the crisis, a bank's board received a single risk report each quarter containing only an aggregate firmwide VaR figure, which stayed within limit. The bank then suffered large losses from concentrated super-senior mortgage exposures. Which governance lesson does this best illustrate?

An aggregate VaR figure masked concentrated tail exposures. Effective governance requires board reports that add stress tests, concentration and exposure detail, and clear discussion of model limitations, rather than discarding VaR or reducing reporting frequency or independent oversight.

  1. AVaR should be eliminated from board reporting entirely
  2. BBoard reporting should be supplemented with stress tests, concentration and exposure detail, and discussion of model limitationsCorrect
  3. CQuarterly reporting should be replaced by annual reporting to reduce noise
  4. DLosses of this type indicate that the board should delegate risk oversight to the traders closest to the positions

Explanation

A single aggregate VaR number hides concentrations, tail risks and model assumptions. Boards need richer information including stress scenarios and limits of the models. Eliminating VaR entirely overcorrects, and less frequent reporting or delegating to traders weakens oversight.

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