Module: | MODULE B: RISK MANAGEMENT
Q376: Consider the following statements regarding the segmentation of Credit Risk in a bank's portfolio:
1. Intrinsic Risk is specific to a particular borrower and can be mitigated through rigorous pre-sanction appraisal.
2. Portfolio Risk arises from systemic factors such as heavy concentration in a single vulnerable economic sector.
3. Group Borrower Limits are primarily implemented to control Intrinsic Risk rather than Portfolio Concentration Risk.
Which of the statements given above is/are correct?
2. Portfolio Risk arises from systemic factors such as heavy concentration in a single vulnerable economic sector.
3. Group Borrower Limits are primarily implemented to control Intrinsic Risk rather than Portfolio Concentration Risk.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: Intrinsic risk refers to borrower-specific factors such as financial weakness, management quality, or operational issues.
This is mitigated at the transaction level using thorough credit appraisal, collateral, and covenants.
Statement 2 is correct: Portfolio risk represents systemic vulnerabilities that transcend individual borrowers, usually caused by over-concentration in specific sectors, geographies, or asset classes.
Statement 3 is incorrect: Single Borrower Limits (SBL) and Group Borrower Limits (GBL) are fundamental tools designed specifically to control Portfolio Concentration Risk, not intrinsic risk.
By capping exposure to a single group, the bank ensures that the default of a massive conglomerate does not collapse the entire portfolio.
This is mitigated at the transaction level using thorough credit appraisal, collateral, and covenants.
Statement 2 is correct: Portfolio risk represents systemic vulnerabilities that transcend individual borrowers, usually caused by over-concentration in specific sectors, geographies, or asset classes.
Statement 3 is incorrect: Single Borrower Limits (SBL) and Group Borrower Limits (GBL) are fundamental tools designed specifically to control Portfolio Concentration Risk, not intrinsic risk.
By capping exposure to a single group, the bank ensures that the default of a massive conglomerate does not collapse the entire portfolio.