Skip to content

FRM Part II · FRM Exam Part II · Credit Risk Management

A bank's board sets a credit risk appetite statement. Which feature would make it most effective in controlling portfolio risk?

Quantitative limits on concentrations, tied to capital and cascaded to business lines, make a risk appetite statement effective. They turn the board's tolerance into measurable, enforceable constraints, whereas vague goals or fully delegated limits cannot control aggregate portfolio risk.

  1. AQuantitative limits on concentrations, tied to capital and cascaded to business linesCorrect
  2. BA general statement that the bank avoids all losses
  3. CAnnual review of the largest borrowers only
  4. DDelegating limit setting entirely to each business line

Explanation

An effective appetite statement translates board tolerance into measurable limits, such as sector, name and rating concentrations linked to capital, and cascades them to business units. Vague statements and full delegation give no consistent control, and reviewing only large borrowers misses portfolio-level concentration.

Did you get it right without looking?

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

Practise Credit Risk ManagementFree diagnostic mock

More Credit Risk Management questions