FRM Part II · FRM Exam Part II · Governance
A bank's board-approved credit risk appetite statement sets a maximum single-name exposure limit of 10% of Tier 1 capital. A relationship manager wants to approve a loan that would take a corporate borrower's exposure to 12% of Tier 1 capital because the borrower has an excellent rating. Under sound credit governance, what is the most appropriate treatment?
The excess must be handled as a documented limit exception escalated to the authority designated in the credit policy. A strong rating does not let a relationship manager override a board-approved limit, and structuring around the limit or amending it afterward would weaken governance.
- AApprove it, because a strong rating justifies exceeding any single-name limit
- BTreat it as a limit exception that must be escalated to the designated approving authority and documented, not approved at the relationship manager's discretionCorrect
- CSplit the loan into two facilities booked under different legal entities so each stays below 10%
- DApprove it and amend the limit retroactively at the next annual policy review
Explanation
Limits set by the board are binding constraints. Exceptions must be escalated to the authority defined in policy and recorded. A good rating does not override the limit, and splitting facilities to dodge the limit or retroactive changes undermine governance.
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