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FRM Part II · FRM Exam Part II · Credit Scoring and Retail Credit Risk Management

A card issuer reviews accounts monthly and raises credit limits automatically for customers with strong repayment histories and low utilization. Which risk is most directly increased by poorly controlled use of this practice?

Uncontrolled automatic limit increases raise exposure at default, because customers can draw more credit even if their creditworthiness has declined since the last review. This makes ongoing behavioral monitoring essential before increasing lines.

  1. AExposure at default grows for customers whose credit quality may have deteriorated since the last assessmentCorrect
  2. BInterest rate risk on the issuer's fixed-rate funding falls
  3. CApplication fraud at origination is eliminated
  4. DScorecard population drift is removed from the portfolio

Explanation

Automatic limit increases raise the potential balance a customer can draw, so EAD rises. If the decision relies on stale information, the lender may extend more credit just as the borrower weakens. The other options describe effects that do not follow from limit increases.

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