B is correct. An internal auditor or an independent model validation group should be responsible for model validation. Having the model developer actively participating in the model validating process is a conflict of interest.

A is incorrect. It is not a conflict of interest. The second line of defense is risk managers that specialize in risk management and day-to-day oversight, which falls under the supervision of the CRO.

C is incorrect. It is not a conflict of interest as these two responsibilities do not conflict with each other from the perspective of a senior economist at a regulatory agency, since it is part of the economist's job responsibility to help draft a proposal for a market reform. A stronger example of a conflict of interest would be, for example, a regulator that helped draft the reform joins a financial consulting firm and advises the industry on how to circumvent the safeguard.

D is incorrect. It is not a conflict of interest. Business unit heads may be compelled to issue an alert when an exposure reaches a certain threshold (e.g., 85% of the limit). The CRO, jointly with the unit head, could then petition the bank's business risk committee for a temporary limit increase. Upon approval, the business risk committee would then submit the request for final approval by the senior risk committee.

Learning Objective: Interpret the relationship between risk and reward and explain how conflicts of interest can impact risk management.

Reference: Global Association of Risk Professionals. Foundations of Risk Management. New York, NY: Pearson, 2023, Chapter 1, The Building Blocks of Risk Management [FRM-1].