Financial Risk Manager Part 1
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Q.70 Valley Bank, under scrutiny for risk management gaps leading to losses, plans to strengthen its Enterprise Risk Management (ERM) program. The board, recognizing the need for robust risk management, appoints a new Chief Risk Officer (CRO), Sam. Sam proposes a comprehensive ERM strategy encompassing five key dimensions: Targets, Structure, Identification and Metrics, ERM Strategies, and Culture. Some board members, concerned about complexity and resources, question the plan's necessity, tasking Sam to convince them. Which of the following arguments best supports the need for a comprehensive approach to the ERM program?
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A
It simplifies the regulatory compliance process and reduces the likelihood of regulatory penalties.
B
It allows for the ERM program to be entirely led by the CRO, reducing the need for involvement from other business areas.
C
It enables a strategic, integrated approach to managing risk at all levels of the organization, which is key to avoiding, mitigating, or transferring risks efficiently.
D
It reduces the need for external audits as the ERM program itself can provide sufficient assurance on risk management practices.
Explanation:
Explanation
All five dimensions are necessary for an effective ERM program as they allow for a holistic approach to risk management, aligning the risk management strategy with the firm's risk appetite and strategic goals. The different dimensions, from setting correct risk targets to defining the roles of key risk officers to identifying and measuring risks, help create a comprehensive structure that considers all facets of risk. The ERM strategies help in deciding whether risk will be avoided, mitigated, or transferred at the enterprise level, while a strong risk culture can foster risk-conscious decision-making throughout the organization.
Why other options are incorrect:
- A: While a comprehensive ERM program can aid in regulatory compliance, this is not the primary reason for its implementation. It is a broader initiative designed to manage all risks across the organization.
- B: A comprehensive ERM program requires involvement from all business areas, not just the CRO. Risk management should be integrated throughout the organization.
- D: While ERM programs provide internal assurance, they do not eliminate the need for external audits, which provide independent validation of risk management practices.
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