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FRM Part II · FRM Exam Part II · Governance

Which feature best characterises an effective escalation process for credit limit exceptions within a credit risk governance framework?

An effective process documents each exception, requires approval at an authority level matching its size, and reports exceptions to senior management and the board risk committee. Unrecorded, automatic or year-end-only reporting weakens control and prevents oversight bodies from seeing how often limits are being overridden.

  1. ABusiness lines may grant temporary exceptions without recording them if repaid within a month
  2. BExceptions are documented, approved at an authority level commensurate with their size, and reported to senior management and the board's risk committeeCorrect
  3. CAll exceptions are automatically approved when the borrower has an internal rating above a set grade
  4. DExceptions are reported only to internal audit at year-end

Explanation

Effective governance requires documented exceptions, approval by appropriate delegated authority, and timely reporting to senior oversight bodies. Unrecorded, automatic or only annual audit reporting undermines control and transparency.

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