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

Which statement best describes a lesson on board oversight drawn from the governance failures of the 2007-2009 financial crisis?

Boards need members with enough financial and risk expertise to understand and challenge complex exposures and management's assumptions. Crisis reviews showed boards often lacked this capability or sufficient information, so oversight of risk strategy was weak. Delegating risk strategy to trading would worsen the problem.

  1. ABoards should focus on financial reporting and leave risk matters to management
  2. BBoards should include members with sufficient financial and risk expertise to understand and challenge complex exposures and management's assumptionsCorrect
  3. CBoards are best served by minimizing the information they receive to avoid overload
  4. DBoards should delegate approval of the firm's overall risk strategy to the head of trading

Explanation

Reviews found that many boards lacked the expertise or information to challenge management on complex products and leverage. The lesson is to ensure adequate risk expertise and effective challenge. Delegating strategy or limiting information reduces oversight.

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