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Answer: Monitor the effectiveness of credit risk assessment tools for retail customers and adjust the tools as needed.
C is correct. The dark side of retail credit portfolios are given by a sudden rise of credit losses due to unexpected but systematic factors that influence the creditworthiness and the behavior of many credit customers in a bank's retail portfolio. An example of a systematic risk factor is the weak (or undetected) performance or the bias of credit risk assessment tools for retail customers. A is incorrect. Focusing on big corporations does not address the dark side risk affecting the retail credit. B is incorrect. The systematic risk factors mentioned are non-diversifiable risks. D is incorrect. Stress tests only help to evaluate/determine risk but do not mitigate risks.
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A credit manager at a US-based commercial bank asks a team of risk analysts to examine the risks attributed to a large retail credit portfolio of the bank. The manager instructs the analyst to suggest measures to mitigate the "dark side" of retail credit risk affecting the portfolio. Which of the following would most likely be an effective measure?
A
Focus the extension of credit on low default portfolios such as mortgages or large corporations.
B
Concentrate on expected loss estimation since systematic risk factors such as a real estate crisis or a sharp economic downturn can be diversified away.
C
Monitor the effectiveness of credit risk assessment tools for retail customers and adjust the tools as needed.
D
Use stress tests to analyze the exposure to idiosyncratic risk factors of every single retail credit customer.