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

Under good risk governance practice for a financial institution, which arrangement best preserves the independence of the Chief Risk Officer (CRO)?

The CRO should report directly to the board's risk committee, with board involvement in removal decisions. This protects independence from revenue-generating units. Reporting to a trading head, or being paid on business-line profits, creates conflicts of interest that weaken challenge of risk-taking.

  1. AThe CRO reports solely to the Chief Financial Officer, who sets the CRO's bonus
  2. BThe CRO has a direct reporting line to the board's risk committee and cannot be removed without board involvementCorrect
  3. CThe CRO reports to the head of the largest trading desk to stay close to risk-taking
  4. DThe CRO is compensated mainly on the profits of the business lines he or she monitors

Explanation

Independence requires that the CRO has direct access to the board or its risk committee and that removal or pay decisions are not controlled by the business lines or revenue-focused executives. The other options create conflicts of interest by tying the CRO to profit-generating or finance-driven management.

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