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Answer: Banks were encouraged to establish an independent risk management function with access to the board of directors.
## Explanation **B is correct.** One of the key governance recommendations that emerged from the 2007-2009 financial crisis was that banks should establish an independent risk management function with direct access to the board of directors. This structural change prevents the risk function from being suppressed or overridden by other divisions (such as trading operations) and ensures that the board receives unbiased risk information to make informed decisions. **A is incorrect** because securitization was actually a key contributor to the financial crisis. Many tranches of securitized mortgages had inflated credit ratings, and when the housing market collapsed, these securities experienced massive losses. Post-crisis regulations did not encourage increased securitization. **C is incorrect** because regulations like Dodd-Frank's Volcker Rule actually prohibited banks from engaging in proprietary trading. Many trading operations were required to be divested from traditional banking operations, not merged with them. **D is incorrect** because post-crisis regulations encouraged central clearing of derivatives rather than OTC trading. Central clearing provides greater transparency and reduces counterparty risk, which was a major concern 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.
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