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

Some firms in the 2007-2009 crisis held concentrated exposures to complex structured products that the board did not fully understand, yet approved the positions on the strength of management's assurance. Which responsibility of the board was most clearly neglected?

The board neglected its responsibility to set risk appetite and to challenge management on whether material risks are understood and consistent with that appetite. Approving complex concentrated positions on management's assurance alone shows a lack of effective challenge, which is a core oversight duty.

  1. ASetting the firm's risk appetite and challenging management on whether risks are understood and aligned with itCorrect
  2. BExecuting the daily trading strategy
  3. CPreparing the firm's financial statements
  4. DSetting the pricing of retail deposit products

Explanation

The board is responsible for setting risk appetite and for effectively challenging management, including ensuring it understands material risks. Approving positions it did not understand reflects a failure of challenge. Daily trading, accounts preparation and deposit pricing are management tasks.

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