Financial Risk Manager Part 1

Explanation

The correct answer is C - Senior management ignored the breaching of risk limits.

Context of the J.P. Morgan Chase 'London Whale' Case:

• In 2012, J.P. Morgan Chase lost over $6.2 billion from exposure to a massive credit derivatives portfolio
• The case revealed a culture of inadequate regulatory oversight
• Risk limits were consistently breached
• Risk metrics were disregarded
• Risk models were manipulated

Why Option C is Correct:

Despite these glaring issues with risk limit breaches, the management did not take any substantial steps to rectify these anomalies. This lack of action on the part of management is a clear manifestation of ignoring the breaching of risk limits.

Additional Context:

• The Chief Investment Office (CIO), which was not a client-facing unit of the bank, was not subject to the same level of regulatory scrutiny as other portfolios
• This further contributed to the lack of adequate management oversight

Why Other Options are Incorrect:

• Option A: While senior managers receiving daily risk reports but not reading them would demonstrate lack of oversight, this was not the specific issue in this case
• Option B: The absence of a risk committee could indicate insufficient oversight, but this was not the primary issue
• Option D: This was not specifically mentioned as the key manifestation of management oversight failure

Key Risk Management Lesson:

This case highlights the critical importance of management actively monitoring and enforcing risk limits, rather than passively receiving reports without taking action when limits are breached.