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

Which governance weakness is most consistently identified in post-crisis reviews of large banks that suffered heavy losses on structured credit positions in 2007-2008?

The key weakness was a risk function lacking independence and stature, such as a chief risk officer reporting to trading heads. Without direct board access and authority, risk managers could not challenge business lines, so excessive risk concentrations in structured credit went unchecked.

  1. AThe chief risk officer reported to the head of trading, which reduced independence and weakened the challenge of risk-takingCorrect
  2. BThe board held too few meetings with the external auditor each year
  3. CThe bank paid dividends too frequently to shareholders
  4. DThe bank's risk limits were set at the individual trader level rather than the desk level

Explanation

Post-crisis reviews highlighted that risk management functions lacked independence and stature, often being subordinate to revenue-generating units, so they could not effectively challenge risk-taking. The other options are not the central governance weaknesses identified in those reviews.

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