FRM Part II · FRM Exam Part II · Governance
A bank's credit risk appetite statement is being redesigned. Which approach is most consistent with sound governance practice for translating board-level appetite into day-to-day lending decisions?
The board-approved appetite should be cascaded into quantitative limits and triggers by portfolio, sector and counterparty, with clear escalation for breaches. Qualitative statements or a single aggregate limit cannot guide granular lending, and appetite approval rests with the board, not one executive.
- AKeep the appetite as a qualitative statement and let each business head set their own limits
- BCascade the board-approved appetite into quantitative limits and triggers by portfolio, sector, and counterparty, with defined escalation for breachesCorrect
- CSet a single bank-wide loss limit and leave allocation to the treasury
- DLet the chief credit officer alone approve the appetite and report it annually to regulators
Explanation
Effective governance has the board approve the appetite, which is then cascaded into measurable limits and triggers with escalation procedures. Purely qualitative statements or one aggregate limit cannot guide granular decisions, and appetite approval belongs to the board, not one executive.
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