A is correct. If the number of lending customers has increased while the average size of a loan has decreased, this is a sign of decreasing concentration in the bank’s loan portfolio. With more smaller loans in the bank’s lending portfolio rather than larger concentrated loans, the bank’s credit risk exposure is more diversified which is likely an indication of less credit risk.

B is incorrect. Funding risk is not a type of credit risk. Also, short-term repo financing is a less reliable source of funding than longer-term funding sources and could prove vulnerable in a financial crisis, so shifting from longer-term funding sources to this funding source typically increases risk to the bank.

C is incorrect. Liquidity and funding risk are not types of credit risk. The liquidity and funding risk of the bank will decline in this case because wholesale deposits are less flexible than retail deposits.

D is incorrect. This observation is not directly related to credit risk and is more related to operational risk. Decreases in employee headcount are likely the result of the bank’s strategic decisions and increasing customer acceptance of the bank’s retail digital platform. However, decreases in headcount might be an indication that the bank is struggling in other areas, so would certainly not be an appropriate indication of decreased risk exposure; rather, they could signal increased operational risk and potentially credit risk as well.

Learning Objective: Describe and differentiate between the key classes of risks, explain how each type of risk can arise, and assess the potential impact of each type of risk on an organization.