FRM Part II · FRM Exam Part II · Governance
During a review, internal audit at a bank finds that the credit risk team has been helping relationship managers redesign the loan approval scorecards and then approving the same scorecards as part of its monitoring role. Which governance concern does this most directly raise under the three lines of defense model?
The main concern is the loss of second-line independence. By helping design the scorecards and then approving them, the credit risk team reviews its own work and cannot provide objective challenge to first-line risk-taking, which undermines the separation the three lines model requires.
- AThe first line is under-resourced to perform its own risk assessments
- BThe second line's independence and ability to provide effective challenge is compromisedCorrect
- CThe third line has failed to report to the board's audit committee
- DRisk appetite has not been cascaded to business units
Explanation
When the second line co-designs and then approves the same scorecards, it is reviewing its own work, which weakens independence and effective challenge. The other options describe issues not evidenced by the facts. Nothing indicates that audit failed to report or that appetite was not cascaded.
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