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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 in a financial institution?

Paying bonuses solely on revenue while treating risk objections as obstruction indicates weak risk culture. Incentives and tone discourage challenge and escalation. Encouraging escalation, giving risk a board reporting line, and mandatory training are features of a sound risk culture.

  1. AEmployees are encouraged to escalate concerns, and escalation is recognized in performance reviews
  2. BFront-office bonuses are based solely on revenue generated, and staff who raise risk objections are viewed as obstructing businessCorrect
  3. CThe risk function has a direct reporting line to the board risk committee
  4. DRisk training is mandatory for all new employees

Explanation

Incentives that reward only revenue and discourage challenge push staff to ignore risk, which is a hallmark of weak risk culture. The other options reflect open communication, independence and awareness, all signs of a sound culture.

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