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Answer: The number of lending customers has increased significantly while the average size of a loan in the bank's lending portfolio has decreased.
## Explanation **A is correct.** When the number of lending customers increases while the average loan size decreases, this indicates: - **Increased diversification** in the loan portfolio - **Reduced concentration risk** - fewer large, concentrated exposures - **Better risk distribution** across multiple smaller borrowers - This diversification directly reduces credit risk exposure **B is incorrect** because: - Funding risk is not a type of credit risk - Short-term repo financing is less reliable than longer-term funding - This shift could increase funding vulnerability during financial stress **C is incorrect** because: - Liquidity and funding risk are not types of credit risk - While retail deposits are more stable than wholesale deposits, this relates to liquidity risk, not credit risk **D is incorrect** because: - This relates to operational risk and strategic decisions - Decreased headcount could signal operational risk issues - Digital platform adoption doesn't directly impact credit exposure Credit risk decreases when the portfolio becomes more diversified with smaller, well-distributed exposures rather than concentrated large loans.
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The CRO of a local bank is examining the latest internal bank-wide risk report. The CRO notes that there are several key risk indicators implying a decrease in the amount of the bank's current credit exposure. Which of the following observations is most likely an indication that the bank's credit risk is decreasing?
A
The number of lending customers has increased significantly while the average size of a loan in the bank's lending portfolio has decreased.
B
The bank's sources of funding have been shifting from longer-term funding sources to short-term repo financing.
C
The bank's total value of retail time deposits on its balance sheet has increased while the value of wholesale deposits has decreased by the same amount.
D
The number of employees at the bank's retail branches has decreased as customer usage of its digital banking platform has increased substantially.
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