FRM Part II · FRM Exam Part II · Credit Scoring and Retail Credit Risk Management
A bank's risk committee is comparing its credit card portfolio with its portfolio of large corporate loans. Which of the following is the most accurate difference in how credit risk is typically managed for the two portfolios?
Retail credit risk is managed with statistical scorecards applied to large pools of small, homogeneous loans, whereas corporate credit risk relies more on individual borrower analysis and judgment, because corporate exposures are large, few and heterogeneous.
- ARetail exposures are usually assessed with statistical scorecards applied to large pools of small, homogeneous loans, while corporate exposures rely more on individual analysis and judgmentCorrect
- BRetail exposures are assessed individually by credit officers, while corporate exposures are assessed by automated scorecards applied to pools
- CRetail credit risk is driven mainly by single-name concentration, while corporate credit risk is driven mainly by portfolio diversification
- DRetail loans are normally priced using market-implied default probabilities from traded bond spreads, while corporate loans are not
Explanation
Retail portfolios consist of many small, similar exposures, so banks use automated scorecards and pool-level statistics. Corporate loans are large and heterogeneous, so individual analysis and rating judgment play a larger role. The reversed statements describe the opposite practice.
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