Forums

Backround information:

In the expert view the three lines of defense model may have weakness in practice. In particular:

• Misaligned incentives for risk-takers in first line of defense.

Many experts agree that the most important control is the first line of defence. However, this responsibility conflicts with the objective of most risk-takers in the first line, which is to generate sufficient revenue and profits for the institution.

• Lack of organisational independence of functions in second line of defense.

Most risk management functions report formally to the board. However, the de facto day-to-day reporting lines and communication channels are more likely to go to senior management than to the board.

Forum discussion questions

  1. In what line of defense your depertment/function is operating?
  2. Can you relate above described situation to your organization?
  3. What possible solutions you can recommend in order to overcomeabvoe described weakness?