FRM Part II · FRM Exam Part II · Governance
In a bank using the three lines model, a relationship manager's bonus is based mainly on loan volume originated, and the credit approval unit reports to the head of sales. Which governance weakness is most directly illustrated?
The weakness is a conflict of interest. Credit approval reporting to sales removes independent challenge, and volume-based bonuses reward originating loans regardless of quality. Good governance separates origination from approval and ties incentives to risk-adjusted performance.
- AExcessive independence of the internal audit function
- BOverly conservative concentration limits
- CConflict of interest from lack of separation between origination and credit approval, reinforced by volume-based incentivesCorrect
- DDuplication of effort between risk and compliance units
Explanation
Credit approval reporting into sales removes independent challenge, and volume-based pay rewards risk-taking without regard to quality. Together they create a conflict of interest. The other options do not describe the facts given.
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