FRM Part I · FRM Exam Part I · Operational Risk

Under the three lines of defense model commonly applied to operational risk governance in banks, which function is primarily responsible for independently assuring the board that the risk management framework is operating effectively?

Internal audit is the third line of defense and provides independent assurance to the board that the operational risk framework and controls work effectively. Business units own risk and the risk function designs and oversees the framework, so neither is the independent assurer.

ABusiness unit management, which owns and manages risks day to day
BThe independent operational risk management function, which designs the framework
CInternal audit, which provides independent assurance on the frameworkCorrect
DThe compliance function, which monitors regulatory change

Explanation

In the three lines of defense model, business units are the first line, the independent risk function is the second line, and internal audit is the third line. Internal audit gives independent assurance to the board on the effectiveness of governance, risk management and controls. The second-line function designs and oversees the framework but is not the independent assurer.

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Under the three lines of defense model commonly applied to operational risk governance in banks, which function is primarily responsible for independently assuring the board that the risk management framework is operating effectively?

Explanation

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