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FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

A bank with large cross-border lending is assessing a geopolitical escalation. Which exposure would most directly represent a credit-risk transmission channel through its loan book?

Loans to corporates dependent on a sanctioned or disrupted economy are the clearest credit-risk channel. Their revenues and supply chains weaken, raising default probabilities and expected losses on the bank's loan book. Central bank reserves and depreciation schedules do not create borrower default exposure.

  1. ALoans to corporates whose revenues depend on a country now facing sanctions and trade disruptionCorrect
  2. BThe bank's holdings of its own subordinated debt
  3. CIts stock of domestic overnight reserves at the central bank
  4. DIts fixed-asset depreciation schedule

Explanation

Borrowers with revenues or supply chains tied to a sanctioned or disrupted economy face weaker cash flows and higher default probabilities, which is the credit channel. Reserves at the central bank and depreciation schedules are not credit exposures to affected borrowers.

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