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FRM Part II · FRM Exam Part II · Governance

During a supervisory review, a bank is found to have risk appetite limits that are routinely exceeded by business lines, with exceptions approved informally and not reported to the board. Which is the most appropriate remediation consistent with sound governance?

The best remediation is a formal escalation and exception process in which limit breaches are reported to the board risk committee and repeated breaches carry consequences. Raising limits, giving monitoring to business lines, or hiding breaches from supervisors weakens independence, transparency and accountability.

  1. ARaise all limits to the level of the current exposures so exceptions disappear
  2. BEstablish a formal escalation and exception process with reporting of breaches to the board risk committee and consequences for repeated breachesCorrect
  3. CMove responsibility for monitoring limits from the risk function to the business lines
  4. DStop reporting limit breaches externally to the supervisor to avoid unnecessary scrutiny

Explanation

Effective governance needs a transparent escalation process, board visibility of breaches, and accountability. Raising limits merely hides the problem, shifting monitoring to the business removes independence, and withholding information from supervisors contradicts regulatory expectations.

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