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

Which situation best illustrates a weak risk culture, as opposed to a weakness in risk appetite metrics?

Paying bonuses on short-term revenue while discouraging staff from raising limit concerns shows weak risk culture, because culture is about behaviors, incentives and openness to challenge. Choices of metrics, confidence levels or review frequency are design issues, not cultural ones.

  1. AThe RAS uses VaR but not stress-test limits
  2. BTraders are paid bonuses on short-term revenue, and staff who raise limit concerns are told they are slowing business downCorrect
  3. CThe board reviews the RAS annually rather than quarterly
  4. DThe firm's economic capital model uses a 99.9% rather than 99% confidence level

Explanation

Risk culture concerns norms, attitudes and behaviors toward risk, shaped by incentives, tone from the top and willingness to challenge. Rewarding short-term revenue and discouraging escalation signals a weak culture. The other options are about metric choice or review frequency, which are design matters.

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