Skip to content

FRM Part II · FRM Exam Part II · Governance

A bank has Tier 1 capital of USD 2,000 million. Its policy caps exposure to any single counterparty at 10% of Tier 1 capital, and exposures above 5% require approval from the credit committee. A relationship manager proposes new facilities for Orion Corp, which already has USD 150 million drawn and USD 40 million of committed undrawn lines (assume full drawdown is counted). What is the maximum additional exposure that can be added within the hard limit, and is credit committee approval required for the resulting total?

Headroom is USD 10 million. The hard limit is 10% of USD 2,000 million, or USD 200 million, and existing exposure including undrawn commitments is USD 190 million. The resulting total exceeds the 5% threshold of USD 100 million, so credit committee approval is required.

  1. AUSD 10 million; approval requiredCorrect
  2. BUSD 50 million; approval not required
  3. CUSD 60 million; approval not required
  4. DUSD 200 million; approval required

Explanation

Hard limit = 10% x 2,000 = USD 200m. Existing exposure = 150 + 40 = USD 190m, so headroom is USD 10m. The total would be 200m, which is above the 5% threshold (USD 100m), so credit committee approval is required. Ignoring undrawn commitments gives USD 50m headroom, which is wrong.

Did you get it right without looking?

One question tells you little. A timed set on Governance shows your real accuracy, how long you take and where you lose marks.

Practise GovernanceFree diagnostic mock

More Governance questions