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FRM Part II · FRM Exam Part II · Governance

Which feature of a credit policy most directly supports consistent underwriting standards across a bank's lending units?

Documented, board-approved credit criteria applied uniformly best support consistent underwriting. These cover target markets, acceptable collateral, pricing and approval authorities. Discretion without written rules, separate rating scales by business line, or standards based only on last year's losses would produce inconsistent and weaker lending decisions.

  1. ADelegated lending authorities that vary by individual officer's personal track record only, with no written criteria
  2. BDocumented, board-approved criteria covering target markets, acceptable collateral, pricing and approval authorities, applied uniformlyCorrect
  3. CAllowing each business line to define its own risk rating scale
  4. DSetting standards annually based solely on the prior year's loss rate

Explanation

Consistency requires written, approved criteria applied uniformly, including approval authorities and acceptable risk characteristics. Unwritten discretion or separate rating scales cause inconsistent standards, and backward-looking loss rates alone are inadequate.

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