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FRM Part II · FRM Exam Part II · Governance

A bank's risk committee notes that exceptions to its credit policy have risen from 3% to 12% of new approvals over two years, mostly approved by senior business heads. Which governance response is most appropriate?

The best response is independent reporting of exceptions to the board risk committee, with root-cause analysis and tracking of how excepted loans perform. This lets governance decide whether to tighten behavior or revise the policy, rather than hiding the trend or weakening the policy.

  1. ARaise the exception approval authority to the CEO to reduce volume
  2. BRequire independent reporting of exceptions to the board risk committee, with analysis of root causes and performance of excepted loansCorrect
  3. CStop reporting exceptions to avoid undermining staff morale
  4. DReplace the credit policy with guidelines that are not mandatory

Explanation

Rising exceptions signal policy drift or an inappropriate policy. Independent escalation, root-cause analysis and tracking of the excepted loans' performance allow the board to recalibrate either the policy or behavior. Hiding data or making policy optional weakens control.

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