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FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management

Which statement best describes how the investment portfolio helps a bank manage credit risk concentration?

The portfolio lets the bank hold securities with exposures different from its local loan borrowers, so geographic and sector concentration falls. It does not prevent default, remove capital requirements, or turn loan losses into gains through reclassification.

  1. AIt allows the bank to hold assets whose credit exposures differ from local loan borrowers, reducing geographic and sector concentrationCorrect
  2. BIt guarantees that securities never default because they are classified as investments
  3. CIt lets the bank avoid capital requirements on securities held
  4. DIt converts loan losses into trading gains through accounting reclassification

Explanation

Banks, particularly those in a single region or industry, can buy securities issued by borrowers elsewhere or by governments, diversifying away from concentrated loan exposure. Securities can still default and carry capital requirements, and reclassification does not remove economic losses.

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