FRM3 - The Governance of Risk Management

Question 1

Explain changes in regulations and corporate risk governance that occurred as a result of the 2007-2009 financial crisis

Answer 1

Basel III was the response, focused on injecting resilience into the banking system

Improved capital requirements and implemented short-term and long-term liquidity ratios. Also addressed corporate governance by clearly defining roles for sectors.

Dodd-Frank Act, aimed at improving consumer protection and systemic stability. Specifically attempted to:
- strengthen the fed
- end too-big-to-fail
- new approach to stress testing
- overhaul derivatives market to address counterparty risk

Question 2

Describe best practices for the governance of a firm’s risk management process

Answer 2

Set up organisation wide infrastructure for defining, implementing, and overseeing risk management

Question 3

Explain the risk management role and responsibilities of a firm’s board of directors

Answer 3

• protect interests of shareholders
• oversee executive management
• address conflicts of interest between management and shareholders

Question 4

Evaluate the relationship between a firm’s risk appetite and its business strategy, including the role of incentives

Answer 4

• board of directors agree risk appetite on an annual basis
• CEO, CRO and CFO empowered by board to implement and oversee risk appetite framework
• senior risk committee determine limiting parameters for risk taken by the firm
• senior risk team reports back to board with recommendations about what total risk seems prudent

Compensation schemes can encourage short-term risk taking and ignore long-term risks. Share based compensation can help to align interests of workers with that of shareholders to discourage long-term ignorance

Question 5

Illustrate the interdependence of functional units within a firm as it relates to risk management

Answer 5

Implementation depends on all business units to work together given a risk management strategy to ensure appropriate implementation

Cycle of senior management, business line, finance and operations, and risk management.

Question 6

Assess the role and responsibilities of a firm’s audit committee

Answer 6

Responsible for:
- reviewing monitoring procedures
- tracking progress of risk management system upgrades
- affirming efficacy of vetting process