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Lay out what a credit committee does within an organisation.

FRM® Part II · Credit Risk Measurement and Management · Governance · FRM2.CR.2.e

The idea

A credit committee is the body that makes or reviews credit decisions collectively instead of leaving them to one person. It approves exposures above individual delegated authority, and large, complex or non-standard proposals, including exceptions to policy. It also supports the framework. It reviews the quality of the portfolio, concentrations, the watchlist and problem exposures, and recommends changes to policy and limits. Its members come from credit and risk, the business and sometimes finance, and it must be able to challenge the business instead of rubber-stamping proposals. It is a decision body inside the risk-taking process and does not originate business or give audit assurance. Routine, in-policy and small credits are normally approved under delegated individual authority. The usual mistake is splitting a deal to get under an approval limit.

A practice question

From the question bank, with the reason each wrong option is wrong.

Which description fits a sound credit committee?

  1. Relationship managers who sponsor the proposals and so form a voting majority of the committee.Why not: Sponsors holding the majority removes independent challenge.
  2. Only internal auditors, so that the committee is fully independent of the business and of risk.Why not: Audit is the third line and should not take credit decisions.
  3. Experienced senior members from several functions who decide collectively and challenge the business. - correct
  4. The full board, which must meet to approve every loan regardless of its size or risk profile.Why not: Boards oversee the framework; approval is delegated, and every loan at board level is impractical.

A credit committee gathers experienced senior people so that decisions are not made by one individual, and it includes risk expertise independent of sales.

A harder one

A credit officer has delegated approval authority of USD 15 million. A proposal for USD 40 million arrives. What is the correct course?

  1. Approve it in two tranches of USD 20 million each so that each is within a lower bracket.Why not: Splitting a deal to avoid an approval limit defeats the purpose of delegated authority.
  2. Approve USD 15 million and let the sales team add the remainder later.Why not: Gets around the limit; the full exposure to the obligor needs approval at the right level.
  3. Ask internal audit to approve, since it is independent of the business.Why not: Audit is the third line and does not take credit decisions.
  4. Refer it to the credit committee or other body with sufficient authority. - correct

Proposals above an individual's authority must be escalated to the credit committee or a higher approver for the whole exposure.

The hardest tier

A chief risk officer finds that the credit committee approves 98 percent of proposals, spends under five minutes on each, never records dissent and is dominated by the head of the business line. What is the most likely weakness?

  1. The committee is too slow and should be replaced by single-officer approvals.Why not: The evidence shows speed and weak challenge, so removing collective review would worsen the problem.
  2. The high approval rate shows origination is of excellent quality, so there is no concern.Why not: Equates approval rate with quality; short, uncontested reviews point to missing challenge.
  3. A rubber stamp without independent challenge, so it adds little control value. - correct
  4. Internal audit is not voting, and it should join the committee as a member.Why not: Audit must stay independent of decisions; giving it a vote would damage the third line.

Challenge is the committee's value. Fast, near-universal approval with no recorded dissent and a dominant sponsor suggests it is not performing it.

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