Risk governance framework and the three lines of defence construct: A challenged self-assessment process through an activity-based approach

Abstract

Since the financial crisis, there has been significant focus by international governing bodies, global regulators and management teams on enhancing corporate and risk governance practices. In international banks, a key component of this objective has been the establishment of a risk governance framework, a foundational pillar of which are the three lines of defence construct that assigns clear control and risk management responsibilities to units in an organisation. The objective of this paper is to recommend, as a best practice, a challenged selfassessment process to assess the robustness of a bank’s three lines of defence construct in light of the continuous changes in its risk profile. In this exercise, each organisational unit would selfassess its core activities against prescribed standards for front line units, control/support units (control/support), independent risk management (IRM) and internal audit. The exercise would confirm each organisational unit’s and its core activities’ placement within the lines of defence construct and determine whether required roles and responsibilities for controlling the risks generated from these activities are being carried out effectively. The exercise, challenged by IRM functions, would identify where the firm needs to establish increased IRM oversight of certain units, activities or processes or enhance the control environment around these activities. The depth, breadth and execution of the assessment exercise can be adapted to the bank’s primary goals or specific concerns related to its control environment. As the exercise is implemented periodically and matures, the bank may also choose to take a concentrated or risk-tiered approach, with certain areas periodically selected for a deeper dive, full end-to-end process review based on monitoring, thematic focus or other considerations.