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FRM Part II · FRM Exam Part II · Risk Governance

In a bank using a three-lines model, the head of the business unit also sets the performance rating and pay of the unit's embedded risk officer. What is the primary governance concern?

The main concern is loss of independence. If the business head determines the risk officer's rating and pay, the officer has reason not to challenge risk-taking, which undermines the second line's objective oversight. Independent reporting lines and compensation set outside the business address this.

  1. AThe risk officer will lack technical knowledge of the products
  2. BThe risk officer's independence is compromised, weakening challenge of the businessCorrect
  3. CRisk reporting will be duplicated across the first and second lines
  4. DThe internal audit function will be unable to review the unit

Explanation

When the business head controls the risk officer's pay and ratings, the officer has an incentive to avoid challenging the business. Independent reporting lines and compensation set outside the business protect objective challenge. Technical knowledge and duplication are not the core issue here.

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