RMU in Risk budgeting chapter

[shanlane]

Hello,

The chapter says something very strange that seems contradictory to what I have read in other chapters. It says that the RMU should be independent (which makes sense) but then it goes on to say that it should NOT report to senior management. I may be missing something subtle here, but I was under the impression that the risk managers were supposed to have a direct line to senior management. I could swear that I read that in a couple of the other readings.

Am I missing something?

Thanks!

Shannon

 

[David Harper CFA FRM]

Hi Shannon, I agree with you, thematically.

• Can i ask you, where in Litterman (page?), I do not recall this suggestion?
• He could (possibly) be referring to: RMU should report to the Board (as the "fiduciary") and not to senior line management. I'm not a fan of the Litterman chapter, it's almost 10 years old referencing a 15+ year old study

but FRM definitely supports "CRO model" of chief risk officer reporting to CEO, with additional accountability to Board as shareholder fiduciary. So, i would not weigh Litterman too heavily

 

[ibrahim-1987]

In my opinion;
1. CRO, should be hired by board of directors, & it is the responsibility of BoD to accept his resignation, not any one else, not by senior management, to avoid senior management pressure in case of extra risk taking, beyond risk appetite.

2. CRO, must report to CEO & BoD, to inform CEO of risks that the bank is exposed to.

3. CRO, should have permission to terminate any trade or activity that threaten the bank existence.

 

[shanlane]

THanks for the advice. THis was another line from Schweser. Your system is so much better.

Thanks again,
Shannon