Learning objectives: Define risk management responsibilities in an organization and explain the three lines of defense framework for effective risk management and control. Explain the processes that lead to risk taking including credit origination, credit risk assessment, and credit approval processes. Discuss the following key principles underlying best practice for the governance system of credit risk: Guidelines, Skills, Limits, and Oversight. Describe the most common parameters of a credit-sensitive transaction. Describe the roles of the credit committee in an organization.
24.3.1. The charts below display the percentage of loans granted by Old Crow Bank. Old Crow Bank is a regional bank located in the state of Missouri.
To reduce its risk, what type of credit limit should Old Crow most likely consider implementing?
a. A counterparty limit because the bank has too many counterparties.
b. A sector limit. The bank is loaning money in too many sectors and would be better served by focusing on one sector.
c. A country limit because of its exposure to the US market.
d. A country limit because of its exposure to Costa Rica.
24.3.2. Julie is a credit officer at Old Crow Bank and is trying to get a $135M loan approved for an R3 internally rated company. Old Crow Bank has the below approval hierarchy.
Who will need to approve this loan?
a. Head of Trading
b. Head of Risk
c. Credit Committee
d. Head of Trading, Head of Risk, Credit Committee
24.3.3. Old Crow Bank had a credit committee meeting yesterday, and the following is a copy of the notes taken during the meeting:
a. The approval documents should have been distributed earlier.
b. Jan monopolized the conversation and did not properly facilitate discussion.
c. The meeting was not properly documented.
d. The vote was not unanimous, so the loan should have been rejected.
Answers here:
24.3.1. The charts below display the percentage of loans granted by Old Crow Bank. Old Crow Bank is a regional bank located in the state of Missouri.
To reduce its risk, what type of credit limit should Old Crow most likely consider implementing?
a. A counterparty limit because the bank has too many counterparties.
b. A sector limit. The bank is loaning money in too many sectors and would be better served by focusing on one sector.
c. A country limit because of its exposure to the US market.
d. A country limit because of its exposure to Costa Rica.
24.3.2. Julie is a credit officer at Old Crow Bank and is trying to get a $135M loan approved for an R3 internally rated company. Old Crow Bank has the below approval hierarchy.
Who will need to approve this loan?
a. Head of Trading
b. Head of Risk
c. Credit Committee
d. Head of Trading, Head of Risk, Credit Committee
24.3.3. Old Crow Bank had a credit committee meeting yesterday, and the following is a copy of the notes taken during the meeting:
- All members are present Jan (Chief Risk Officer), Eddie (Head of Compliance), Alyssa (Head of Legal), Don (Head of Tax), and Ashton (Chief Financial Officer).
- Jan initiated the meeting by confirming if everyone had received an email containing approval documents from credit officer Doug, who had originated the loan. Everyone confirmed receiving the email with the documents yesterday.
- Jan provided an overview of the loan for approximately five minutes, after which she proceeded to inquire about the opinions of those present. It was the consensus of all individuals, except for Alyssa, that the loan be approved. Alyssa expressed concern regarding the trustworthiness of the counterparty.
- Jan respects Alyssa's opinion but disagrees and initiates a vote. Two other committee members agree with Jan, resulting in loan approval.
a. The approval documents should have been distributed earlier.
b. Jan monopolized the conversation and did not properly facilitate discussion.
c. The meeting was not properly documented.
d. The vote was not unanimous, so the loan should have been rejected.
Answers here:
