Explanation:
For a Risk Management Unit (RMU) to function effectively, it must be completely independent from the business lines it monitors. In this scenario, the Chief Risk Officer (CRO) is reporting to the Head of Credit. Because the Credit department is directly responsible for generating credit risk, having the CRO report to its head creates a glaring conflict of interest, severely compromising the RMU's independence. Best practices require the CRO to report directly to the CEO or the Board of Directors.
Ultimate access to all questions.
No comments yet.
Q.39 Prime Bank of India is one of the largest lenders to small and medium enterprises in the country. The bank recently established a risk management unit (RMU) to better manage the various risk categories and ensure that risk exposures are authorized and are in line with the bank’s risk appetite statement. The bank’s top brass have come up with a clearly outlined reporting framework for the RMU, where the chief risk officer reports to the head of credit, who in turn reports to the board. Which of the following statements is correct?
A
The bank follows the best risk management practices.
B
The bank must not have an independent risk management unit. Rather, it should establish a risk department within the credit unit
C
The RMU lacks independence
D
The bank’s risk management practices are satisfactory.