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FRM Part I · FRM Exam Part I · The Governance of Risk Management

In its review of the 2007-2009 financial crisis, which governance weakness at many large banks is most consistent with GARP's reading on the governance of risk management?

A common crisis-era governance failure was a weak, non-independent risk function whose chief risk officer lacked stature and board access, so emerging risk concerns were not escalated or acted upon. Limits were generally too permissive and capital too thin, not excessive.

  1. AThe chief risk officer had limited stature and was not independent of the business lines, so risk concerns were not escalated to the boardCorrect
  2. BThe board delegated all strategic decisions to external auditors
  3. CRisk limits were set too low, which prevented any trading profits
  4. DThe firm held excess capital that was never deployed

Explanation

Post-crisis reviews found that risk functions often lacked authority, independence and direct board access, so warnings about concentrations were not acted on. The other options describe features that were not characteristic of the failures: auditors do not set strategy, limits were often too lax, and capital was thin rather than excessive.

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