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Lecture 9: Three Lines of Defense Risk Management Framework - Consumer Credit Risk Management Fundamentals - by Frank Tian
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Then let's look at this important risk management framework from the Institute of Internal Auditors.
So this is called the three lines of defense model.
It's widely adopted after the 2008 financial crisis, widely used in the financial services industries,
but also it applies to other industries as well.
So first, you have the first line of defense, so this is within the pieces, within each line of business,
whoever remains the product, need to exert some momentum in the House.
Because they understand the business, they know what the risks are, so they know how to mitigate that in the first place.
OK, so also within the first line, there shall be some internal controls, right?
So doublecheck, have an additional set of eyes, make sure things are done properly.
So that's the first line of defense.
Then there is the second line of defense, there are a few corporate functions, for example, for national control, security, risk management, quality inspection, and compliance.
So second line of defense is supposed to.
Bring up a credible challenge to the practice of first line of defense.
So if there's any loophole, so second line defense can point it out.
And work together with first line to perfect the process.
Reduced risk.
OK, so then you have a certain line of defense, this refers to the internal audit team.
So they reveal the practice as a first line and second line.
Right, to see whether they are doing their own jobs.
So you're the internal audit will work with the first line, second line once a year, depending on the different errors.
So different emphasis.
So then this is how you have three lines of defense, right.
To look at the same.
Areas to reduce the risk.
All of the three lies report to the senior management, so they are executives responsible for the day
to day operations through the line of defense.
Internal audit also reports to the board.
So there's all the committee, so if there's an issue, the board or the committee, they can talk
to the executive team.
This is the video in the.
This is the entity outside, you still have an excellent audit as an independent review, right?
So just in case, sometimes internal audit, maybe they are influenced to steal by the executives.
It's possible then you have also the regulators.
So they come in, they look at your practice and see there is anything you should do better so they can bring the Norrish from the regulator as well as from what they have seen in other entities within the same industry.
So so that's the three line for defense risk management framework.
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