1.3 - The Governance of RM

Question 1

What is the role of the board of directors in risk governance?

Answer 1

Overseeing and approving a firm’s risk governance.

Question 2

What is an ‘agency problem’ in corporate governance?

Answer 2

Conflicts of interest between senior management and other internal management.

Question 3

What was one major goal of the Dodd-Frank Act?

Answer 3

Ending ‘too-big-to-fail’ by creating an orderly liquidation authority (OLA).

Question 4

What are the four basic choices a bank has regarding risk exposure?

Answer 4

Avoid, transfer, mitigate, or assume the risk.

Question 5

Who must certify the accuracy of financial reports under the Sarbanes-Oxley (SOX) Act?

Answer 5

CEO and CFO.

Question 6

What is a risk appetite statement (RAS)?

Answer 6

A statement defining the level and types of risk a firm is willing to accept to reach business goals.

Question 7

What are the key responsibilities of an internal audit function?

Answer 7

Assessing risk governance, reviewing risk management, verifying compliance, and ensuring data security.

Question 8

How did MF Global’s governance failures contribute to its collapse?

Answer 8

Ignored CRO warnings, made risky European sovereign debt investments, and misappropriated client funds.

Question 9

What is the purpose of stress testing under Dodd-Frank?

Answer 9

To evaluate how macroeconomic downturns impact various types of risk across financial institutions.

Question 10

Why should a bank operate well below its risk limits?

Answer 10

To ensure flexibility in managing unexpected risk fluctuations.

Question 11

What are Tier 1 risk limits?

Answer 11

Specific limits requiring immediate correction if exceeded, often including asset class caps and stress-test limits.

Question 12

What are Tier 2 risk limits?

Answer 12

Generalized limits related to business activities, industries, regions, or maturities, with more flexibility in corrections.

Question 13

What were three recommendations from the Financial Stability Board after the 2007-2009 financial crisis?

Answer 13

No guaranteed multi-year bonuses, deferring executive compensation, and limiting variable pay relative to revenue.

Question 14

What are the roles of the senior management risk committee?

Answer 14

Setting risk limits, enforcing corporate policies, and overseeing the CRO’s daily risk decisions.

Question 15

What role does the board audit committee play?

Answer 15

Evaluating financial reporting, compliance, internal control, and risk management processes.

Question 16

How does the Dodd-Frank Act regulate derivatives markets?

Answer 16

By increasing transparency and reducing counterparty risk.

Question 17

What are key considerations in constructing a risk appetite?

Answer 17

Business strategy alignment, risk appropriateness, planning integration, and clear communication.

Question 18

What factors determine the stature of the Chief Risk Officer (CRO) in an organization?

Answer 18

Position in executive leadership, reporting structure, independence, authority, and compensation.

Question 19

What is the purpose of a ‘living will’ under Dodd-Frank?

Answer 19

It provides a resolution plan for systemically important financial institutions (SIFIs) in case of failure.

Question 20

Why was the leverage ratio under Basel III set at 3% instead of 5%?

Answer 20

To balance financial stability with banks’ ability to lend and manage capital efficiently.