FRM Part II · FRM Exam Part II · Governance
During a review, internal audit finds that a bank's credit risk management department has been co-designing loan pricing models with the trading and lending desks and signing off on them as approver. Which concern is most directly raised under the three lines of defense model?
The main concern is that the second line's independence is compromised. By co-designing and then approving the pricing models, risk management performs a first line function and effectively reviews its own work, which weakens its ability to provide objective challenge.
- AThe second line's independence is compromised because it is acting in a first line roleCorrect
- BThe third line has too little authority over the first line
- CThe first line is over-reporting risk to the board
- DThe model lacks sufficient data history for calibration
Explanation
When the second line co-designs and approves business models, it takes on first-line ownership and then must challenge its own work, undermining independent challenge. Audit's finding itself is appropriate third-line behavior. The other options do not follow from the facts given.
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