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FRM Part II · FRM Exam Part II · Governance

A bank's board approves a credit risk appetite statement and a credit policy. Which responsibility is most appropriately retained by the board rather than delegated entirely to management?

The board should retain responsibility for setting overall credit risk appetite and approving major credit policy parameters. Individual loan approvals, rating assignments and covenant negotiation are operational tasks delegated to management and the credit function, operating within board-approved limits and policy.

  1. AApproving individual loan applications below the single-name limit
  2. BSetting the overall credit risk appetite and approving the major credit policy parametersCorrect
  3. CAssigning internal ratings to new borrowers
  4. DNegotiating covenants in individual loan agreements

Explanation

The board sets the risk appetite and approves the key policy framework, including broad limits. Day-to-day approvals, rating assignment and covenant negotiation are management or credit function tasks. Delegating the appetite itself would remove board oversight of the bank's risk-taking.

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