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Answer: Banks were encouraged to establish an independent risk management function with access to the board of directors.
## Explanation After the 2007-2009 financial crisis, regulatory reforms focused on improving risk governance within financial institutions. Option B correctly describes one of the key regulatory impacts: - **Independent Risk Management Function**: Post-crisis regulations (such as the Dodd-Frank Act in the US and Basel III internationally) emphasized the need for banks to establish independent risk management functions that report directly to the board of directors. This separation ensures that risk oversight is not unduly influenced by business units focused on revenue generation. **Why other options are incorrect:** - **Option A**: Actually, post-crisis regulations moved in the opposite direction - requiring banks to retain some "skin in the game" through risk retention rules rather than securitizing all mortgages. - **Option C**: The Volcker Rule actually prohibited proprietary trading by banks, requiring separation rather than merging these operations with traditional banking. - **Option D**: Post-crisis reforms pushed for central clearing of standardized derivatives through exchanges and clearinghouses to increase transparency, not OTC trading which was seen as contributing to systemic risk. The emphasis on independent risk management with board access was a direct response to governance failures where risk functions were often subordinated to business objectives during the crisis.
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A junior analyst has just started working for a national banking supervisor and is training for a position as a bank examiner. As part of the training program, the analyst is asked to explain how banking regulations evolved as a result of the 2007–2009 financial crisis to encourage better risk governance. Which of the following correctly describes an impact of regulations that were introduced as a result of the crisis?
A
Banks were required to securitize all the mortgages they originate in order to distribute risk across financial institutions.
B
Banks were encouraged to establish an independent risk management function with access to the board of directors.
C
Proprietary trading operations were merged with traditional banking operations to provide banks better governance over their trading desks.
D
Derivatives were encouraged to be traded OTC rather than centrally cleared to provide greater transparency.