FRM Part II · FRM Exam Part II · Governance
A bank's board-approved credit risk appetite statement sets a maximum tolerance for non-performing loans and a concentration ceiling by sector. Which of the following best describes the role of the credit policy relative to this statement?
The credit policy turns the board's risk appetite into practical rules, covering eligible borrowers, underwriting standards, approval authorities and limit structures. It complements rather than replaces borrower limits, and is owned by management and the credit function, not internal audit or relationship managers.
- AIt translates the risk appetite into operational rules such as eligible borrowers, approval authorities, and limit structuresCorrect
- BIt replaces the need for individual borrower limits because the appetite is already set at board level
- CIt sets the pricing of each loan based on the relationship manager's judgment
- DIt is prepared by the internal audit function to test compliance with the appetite after losses occur
Explanation
The credit policy operationalizes the board's risk appetite through rules on target markets, underwriting standards, delegated authorities and limits. It does not replace limits, is not about discretionary pricing, and is owned by management rather than audit.
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