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FRM Part II · FRM Exam Part II · Risk Governance

Under the three lines of defence approach described in the Basel principles, a bank's business unit head says that operational risk is the sole responsibility of the independent corporate operational risk function. Which response best reflects the principles?

Business line management is the first line of defence and is responsible for identifying and managing the operational risks in its own products, activities, processes and systems. The independent operational risk function challenges and oversees, and audit gives assurance, so the unit head's claim is wrong.

  1. ACorrect, because the first line should only execute transactions and leave risk management to the second line
  2. BIncorrect, because business line management is responsible for identifying and managing the risks inherent in its products, activities, processes and systemsCorrect
  3. CCorrect, because the internal audit function owns the framework and its implementation
  4. DIncorrect, because the board must manage operational risks in each business line directly

Explanation

The first line, business line management, owns the risks in its own products, activities, processes and systems. The corporate operational risk function (second line) designs and maintains the framework and challenges the first line, so it is not solely responsible. Internal audit provides independent assurance rather than owning the framework.

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