FRM Part II · FRM Exam Part II · Governance
Which activity is most appropriately performed by the third line of defense in a bank's credit risk governance?
The third line, internal audit, independently assesses whether the credit risk framework and controls work effectively and reports to the board. Originating loans is first line, setting limits and monitoring concentrations is second line, and approving risk appetite belongs to the board.
- AIndependently assessing whether the credit risk management framework and controls operate effectivelyCorrect
- BOriginating loans and monitoring borrower covenants daily
- CSetting the credit risk limits and monitoring aggregate portfolio concentrations
- DApproving the bank's overall credit risk appetite statement
Explanation
The third line, internal audit, gives independent assurance to the board on the effectiveness of governance, risk management and controls. Originating loans is first line, limit setting and portfolio monitoring is second line, and approving risk appetite is a board responsibility.
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