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

Which feature of retail lending most commonly leads banks to define default at the facility or product level, using days past due, rather than at the obligor level as is common for corporate borrowers?

Retail portfolios are small and numerous, so banks practically define default per account using days past due, such as 90 days, rather than assessing each borrower individually as is common with corporate obligors.

  1. ARetail exposures are small and numerous, so delinquency status per account is a practical and timely default triggerCorrect
  2. BRetail borrowers never hold more than one product
  3. CCorporate borrowers are never assessed for days past due
  4. DRetail default is determined only by market equity prices

Explanation

With many small accounts, monitoring delinquency per account (such as 90 days past due) is practical and objective. The other statements are false generalizations or irrelevant, since retail borrowers often hold several products and corporate defaults also use unlikeliness-to-pay criteria.

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