Financial Risk Manager Part 2

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Explanation:

According to Basel guidelines on operational risk governance, a strong governance framework relies on the "Three Lines of Defense" model, where the third line involves an independent review of the operational risk management framework, typically performed by internal or external audit.

Option A is incorrect because outsourcing does not relieve management of their responsibility for internal controls.
Option B is incorrect since the bank is planning to adopt the Basel III Standardized Approach (SA), which replaces the Advanced Measurement Approaches (AMA) that permitted the use of internal models.
Option D is incorrect because the business line managers (First Line of Defense) are the primary owners of risk exposures, not the risk management function (Second Line of Defense).

Explanation:

Option A is incorrect because outsourcing does not relieve management of their responsibility for internal controls.
Option B is incorrect since the bank is planning to adopt the Basel III Standardized Approach (SA), which replaces the Advanced Measurement Approaches (AMA) that permitted the use of internal models.
Option D is incorrect because the business line managers (First Line of Defense) are the primary owners of risk exposures, not the risk management function (Second Line of Defense).

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Question The board of directors of a midsize bank has recommended that the bank improve its processes for managing operational risk. The CEO asks an enterprise risk manager to review the bank’s tools and processes for managing operational risk and to suggest improvements that are consistent with Basel II and Basel III guidelines for operational risk governance. The bank also plans to adopt the new Basel III standardized approach (SA) to determine its regulatory capital for operational risk. Which of the following actions should the manager recommend that the bank take?

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Last updated: July 5, 2026 at 07:28

Use third-party outsourcing agreements to replace most internal controls performed by senior managers and business line managers.

Develop an internal approach to model the distribution of operational risk losses and use it to determine the bank’s regulatory capital.

Require an independent review of the bank’s operational risk management framework.

Designate the risk management function as the primary owner of risk exposures within each business line.