Financial Risk Manager Part 2
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A Chief Risk Officer (CRO) at a large financial institution is tasked with reviewing the company's economic capital structure to ensure compliance with industry standards. During this review, the CRO identifies deficiencies in the governance framework and in the methodology used for calculating the total economic capital. Prompted by an internal auditor, the CRO must recommend corrective actions that adhere to best practice guidelines. What specific steps should the CRO suggest to address these issues?
A Chief Risk Officer (CRO) at a large financial institution is tasked with reviewing the company's economic capital structure to ensure compliance with industry standards. During this review, the CRO identifies deficiencies in the governance framework and in the methodology used for calculating the total economic capital. Prompted by an internal auditor, the CRO must recommend corrective actions that adhere to best practice guidelines. What specific steps should the CRO suggest to address these issues?
Explanation:
The correct answer is C: Incorporate a set of escalation procedures into the bank's contingency plan for its economic capital policy. This is because the text states that a capital policy should include governance and escalation protocols that are clear, credible, and actionable in the event an actual or projected capital ratio target is breached.
Option A is incorrect because the board of directors should be responsible for challenging assumptions in capital models and providing final approval, not the business unit managers.
Option B is incorrect as this method is overly conservative and does not account for diversification benefits.
Option D is incorrect because the use of third-party vendor models is not discouraged. Instead, banks are encouraged to tailor these scenarios to their specific risk profiles and unique vulnerabilities, but there is no guideline against using third-party vendor scenarios.