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

A bank's credit risk committee reviews a proposal to let relationship managers approve their own large corporate loans to keep clients satisfied. Which governance principle is most directly compromised by this proposal?

The proposal compromises independence between origination and approval. Relationship managers benefit from winning business, so letting them approve their own large loans creates a conflict of interest and weakens the independent credit challenge that sound governance requires.

  1. AIndependence between credit origination and credit approvalCorrect
  2. BDiversification of the loan book by sector
  3. CUse of risk-adjusted pricing for loans
  4. DAlignment of loan maturities with funding tenors

Explanation

Sound credit governance separates the people who originate and earn revenue from a loan from those who approve it. Letting relationship managers approve their own large loans creates a conflict of interest. The other options are valid practices but are not what this proposal undermines.

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