FRM Part II · FRM Exam Part II · Governance
A bank's early-warning framework for its corporate loan portfolio is being redesigned. Which design feature best reflects sound credit monitoring practice?
Best practice uses forward-looking triggers such as covenant headroom, spread widening and rating outlook changes, linked to documented escalation and watchlist actions. This detects deterioration before default. Annual reviews, 90-days-past-due triggers and informal judgement are lagging, inconsistent or unauditable and so are weaker monitoring designs.
- ATriggers based on forward-looking indicators such as covenant headroom, spread widening and rating outlook changes, with defined escalation and watchlist actionsCorrect
- BAnnual review of financial statements as the sole monitoring tool for all borrowers
- CMonitoring only after a payment is more than 90 days past due
- DReliance on the relationship manager's informal judgement without documented triggers
Explanation
Sound monitoring uses forward-looking, documented triggers linked to escalation steps so deterioration is caught before default. Annual reviews and 90-day delinquency are lagging, and informal judgement is inconsistent and unauditable.
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