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Answer: Design a compensation plan that rewards business activities that benefit the bank at the enterprise level.
**D is correct.** Many ERM programs that look well established may not be comprehensive. For example, surveys suggest that only around half of CROs review the impact of compensation plans on a firm's risk appetite and culture—arguably a critical ERM function. Therefore, the bank should encourage the development of a compensation plan that rewards business activities that are consistent with the ERM program. **A is incorrect.** This is a hallmark of a silo-based strategy: each risk type is managed using risk-specific transfer instruments. **B is incorrect.** Business lines and risk management function are the responsible parties for making day-to-day risk management decisions. **C is incorrect.** Hedging within business lines is a hallmark of a silo-based strategy. ERM suggests that firms also need to articulate specific strategies for managing enterprise-scale risks at either the enterprise level or through the business lines. **Learning Objective:** Describe Enterprise Risk Management (ERM) and compare an ERM program with a traditional silo-based risk management program.
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Responding to recent market news that a large hedge fund is experiencing difficulties, the CEO of a bank requests information regarding the bank's exposure to that fund and other major counterparties. The CRO of the bank reviews the bank's credit exposures and notes that the bank has exposures to hedge fund counterparties across different lines of business, which are not aggregated. The CRO recommends implementing an ERM program to improve the bank's risk governance. Which of the following actions would be most appropriate for the CRO to suggest?
A
Manage different classes of enterprise-wide risk using transfer instruments specific to each class.
B
Designate the board of directors as the responsible party for making day-to-day risk management decisions.
C
Aggregate risk exposures across risk types but maintain hedging strategies within the business lines.
D
Design a compensation plan that rewards business activities that benefit the bank at the enterprise level.
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