Explanation:

In the three lines of defense model, the first line of defense consists of business line managers who own and manage the risks. They are responsible for implementing the ERM framework in their daily operations and should have the authority to take on risks within the bank's defined risk appetite.

Option A is incorrect because the third line of defense (internal audit) provides periodic independent assurance, while continuous monitoring of implementation is management's responsibility.
Option C is incorrect because quantifying financial losses directly caused by failures in risk culture is highly subjective and virtually impossible to accurately measure, given that culture is qualitative.
Option D is incorrect because the executive committee is part of senior management (oversight) and not the second line of defense, which generally consists of dedicated risk management and compliance functions.

Question A community bank uses the three lines of defense approach to manage its operational risk exposures. The bank is in the process of implementing an enterprise risk management (ERM) framework, and the CRO decides to extend the three lines of defense approach to its implementation of ERM. The CRO also wants to ensure that the ERM framework appropriately reflects the bank’s risk appetite and risk culture. Which of the following actions should the CRO recommend for the bank to take?

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Last updated: July 5, 2026 at 07:29

The third line of defense should continuously monitor the bank’s implementation of its ERM framework to ensure its effectiveness.

Business line managers, as part of the first line of defense, should have the authority to take on risk exposures within the bank’s risk appetite limits.

The bank should implement a set of risk culture indicators as part of its ERM framework in order to accurately quantify the losses that could occur due to failures of risk culture.

As part of the second line of defense, the executive committee should perform an independent review of the bank’s risk management framework.

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