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P1.T1.505. Mechanisms for transmitting risk governance (Crouhy, Galai & Mark)

Nicole Seaman

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Learning outcomes: Distinguish the different mechanisms for transmitting risk governance throughout an organization. Illustrate the interdependence of functional units within a firm as it relates to risk management. Assess the role and responsibilities of a firm’s audit committee.

Questions:

505.1. A key but new (recent) mechanism for risk governance is the risk advisory director. Which of the following best summarizes the function of a risk advisor director?

a. To ensure the accuracy of the bank’s financial and regulatory reporting, and the bank's compliance with minimum or best-practice standards in other key activities; e.g., regulatory, legal, compliance, and risk management activities
b. To improve the overall efficiency and effectiveness of the senior risk committees and the audit committee, as well as the independence and quality of risk oversight by the main board
c. To be responsible for independently reviewing the identification, measurement, monitoring, and controlling of credit, market, and liquidity risks, including the adequacy of policy guidelines and systems
d. To design and implement the incentive pay and compensation schemes for executives and staff


505.2. Each of the following is true about the re-empowered role of the Chief Risk Officer (CRO) EXCEPT which is false?

a. The CRO should report to line business management, but should be independent of both the CEO and the board's risk committee
b. The CRO must evaluate all new financial products to verify that the expected return is consistent with the risks undertaken
c. CROs should not just be after-the-fact risk managers but also risk strategists
d. The CRO they should play a significant role in determining the risks that the bank assumes as well as helping to manage those risks.


505.3. Crouhy writes, "To achieve best-practice corporate governance, a corporation must be able to tie its board-approved risk appetite and risk tolerances to particular business strategies. This means, in turn, that an appropriate set of limits and authorities must be developed for each portfolio of business and for each type of risk (within each portfolio of business), as well as for the entire portfolio." According to Crouhy, which of the following statements is true about limits and limit standard policies?

a. Limits are effective for market risk but they cannot be applied to credit risk
b. Limits should be calibrated such that in the normal markets exposures average about 100% of the limit
c. Two different types of limits--e.g., Type A (Tier 1) and Type B (Tier 2)--should be avoided because this encourages "cherry picking" the more accommodating limit
d. Limits should be expressed in normal markets (e.g., VaR) but they should also be expressed in worst-case scenarios, probably by scenario analysis and/or stress testing

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