Financial Risk Manager Part 1

Explanation

Mitigation in the context of credit risk management refers to the reduction of risk by implementing measures that eliminate or reduce exposure. This can be achieved through various strategies, one of which is the adoption of a rigorous screening process at the application stage. This process helps the bank to assess the creditworthiness of potential borrowers, thereby reducing the likelihood of default. By doing so, the bank can mitigate the potential losses that may arise from non-payment of loans. This strategy is particularly effective as it allows the bank to identify and address potential risks before they materialize, thereby enhancing the overall effectiveness of the bank's credit risk management framework.

Choice A is incorrect. Retaining credit risk refers to the bank's decision to accept and manage the risk internally, rather than transferring it to another party. It does not involve a stringent screening process during the application phase.

Choice B is incorrect. Avoiding credit risk means that the bank chooses not to engage in any transaction that might expose it to potential credit losses. While a stringent screening process could potentially help avoid risky borrowers, this method generally involves abstaining from certain types of transactions or sectors altogether.

Choice D is incorrect. Transferring credit risk involves shifting the potential loss from a default event onto another party, typically through financial instruments such as derivatives or securitization. This strategy does not directly involve a stringent screening process during the application phase.