FRM Part II · FRM Exam Part II · Credit Risk Management
A bank's board wants to set a credit risk appetite framework. Which element is most consistent with sound practice?
Sound practice is a board-approved risk appetite stated in quantitative metrics and concentration limits, monitored regularly with defined escalation for breaches. Delegating everything to business lines, ignoring concentrations or relying only on regulatory minimums leaves the board without effective control over credit risk.
- ASetting a single aggregate loan growth target without limits on concentrations
- BDelegating all limit-setting to business lines, with the board informed only of breaches annually
- CDefining appetite using quantitative metrics and concentration limits, approved by the board and monitored with escalation procedures for breachesCorrect
- DBasing appetite solely on regulatory minimum capital ratios
Explanation
Sound governance has the board approve risk appetite expressed through measurable metrics and limits (e.g., by obligor, industry, rating), with regular monitoring and escalation. Options A and B lack limits and oversight; D ignores internal risk views and buffers beyond regulatory minimums.
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