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

Which situation most clearly indicates a weak risk culture at a financial institution, even though its formal policies appear comprehensive?

Short-term revenue-driven pay combined with discouragement of employees who raise limit concerns signals a weak risk culture, because incentives and tone shape behaviour more than written policies do. Consulting the CRO, reporting breaches to the board and training are signs of good practice.

  1. ASenior management regularly discusses risk-taking decisions with the chief risk officer before approving new products
  2. BStaff compensation is based almost entirely on short-term revenue, and employees who raise concerns about limit excesses are viewed as obstructing businessCorrect
  3. CBreaches of risk limits are recorded and reported to the board risk committee
  4. DEmployees receive annual training on the firm's code of conduct

Explanation

Risk culture is shown by incentives and behaviour, not by written policy alone. Pay tied only to short-term revenue and discouragement of challenge undermine escalation and accountability, and are classic weaknesses seen in failures. The other options describe sound practices such as CRO involvement, reporting of breaches and training.

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