Module: | MODULE B: RISK MANAGEMENT
Q390: Consider the following statements regarding Active Credit Portfolio Management (ACPM) in a commercial bank:
1. ACPM shifts the bank's strategy from a passive 'buy-and-hold' approach to dynamically managing the risk-return profile of the loan portfolio.
2. The direct selling of existing standard loans in the secondary market is strictly prohibited under the ACPM framework.
3. Credit derivatives and securitization are primary structural tools utilized in ACPM to hedge against sectoral concentration risk.
Which of the statements given above is/are correct?
2. The direct selling of existing standard loans in the secondary market is strictly prohibited under the ACPM framework.
3. Credit derivatives and securitization are primary structural tools utilized in ACPM to hedge against sectoral concentration risk.
Which of the statements given above is/are correct?
✅ Correct Answer: C
The correct answer is C. Statement 1 is correct: Active Credit Portfolio Management (ACPM) represents a paradigm shift from the traditional passive 'buy-and-hold' lending model to a dynamic model where the portfolio is actively traded and hedged to optimize economic capital and maximize risk-adjusted returns.
Statement 3 is correct: To manage concentration risk (e.g., too much exposure to the real estate sector), ACPM relies heavily on structural risk-transfer tools like Credit Default Swaps (credit derivatives) and Securitization to offload risk to third parties.
Statement 2 is incorrect: Selling existing, performing (standard) loans in the secondary market (Loan Sales/Syndication) is a fundamental, heavily utilized mechanism of ACPM.
It allows banks to quickly exit concentrated positions and free up capital limits for new, diversified lending.
It is not prohibited.
Statement 3 is correct: To manage concentration risk (e.g., too much exposure to the real estate sector), ACPM relies heavily on structural risk-transfer tools like Credit Default Swaps (credit derivatives) and Securitization to offload risk to third parties.
Statement 2 is incorrect: Selling existing, performing (standard) loans in the secondary market (Loan Sales/Syndication) is a fundamental, heavily utilized mechanism of ACPM.
It allows banks to quickly exit concentrated positions and free up capital limits for new, diversified lending.
It is not prohibited.