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FRM Part II · FRM Exam Part II · Risk Governance

During a review, a bank finds that its business lines routinely operate near their risk limits, but senior managers are rewarded solely on revenue growth and limit breaches rarely lead to consequences. Which weakness in risk appetite implementation does this most directly indicate?

The pattern shows incentives and accountability are misaligned with the risk appetite. Rewarding only revenue and ignoring breaches encourages risk-taking at the limits, weakening risk culture. Sound governance links compensation and consequences to compliance with the appetite statement and tolerances.

  1. AIncentives and accountability are not aligned with the risk appetite, weakening risk culture and the effectiveness of the limitsCorrect
  2. BThe risk appetite is set too conservatively relative to the bank's capital
  3. CThe bank has too many independent risk management staff
  4. DRisk limits should be removed since they have no effect on behaviour

Explanation

Remuneration based only on revenue with no consequences for breaches encourages risk-taking up to or beyond limits. Sound governance links compensation and accountability to adherence to appetite and tolerance. The other options are not supported by the facts described.

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