FRM Part I · FRM Exam Part I · Credit Risk Transfer Mechanisms
Which statement about credit risk transfer via loan sales versus credit derivatives is most accurate?
Credit derivatives allow a bank to transfer credit risk without selling the underlying loan and typically without needing the borrower's consent or knowledge. Loan sales, by contrast, move the asset and its default risk to the buyer.
- ACredit derivatives allow risk transfer without transferring the underlying loan or necessarily informing the borrowerCorrect
- BLoan sales never remove the exposure from the balance sheet
- CCredit derivatives always require the borrower's consent
- DLoan sales leave all default risk with the seller
Explanation
CDS can hedge credit risk while the loan stays on the books and the relationship is untouched. Loan sales do remove exposure. Consent is not required for CDS, and sold loans transfer default risk to the buyer.
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