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

In the governance reforms that followed the 2007-2009 financial crisis, many banks strengthened the position of the chief risk officer (CRO). Which feature best reflects sound governance of the CRO role?

The CRO should have direct access to the board risk committee and be independent of revenue-generating units. This lets the CRO challenge risk-taking without conflicts of interest. Reporting to trading heads or being paid on their profits would undermine objectivity.

  1. AThe CRO reports primarily to the head of the main trading business to keep risk close to the front office
  2. BThe CRO has direct access to the board risk committee and independence from revenue-generating unitsCorrect
  3. CThe CRO's compensation is tied mainly to the profits of the trading desks he or she oversees
  4. DThe CRO is appointed and removed solely by the head of business lines

Explanation

Sound governance requires the CRO to be independent of profit-making units and to have direct access to the board or its risk committee. Reporting to or being paid by the businesses being monitored creates conflicts of interest and weakens challenge of risk-taking.

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