Cadigal Bank has compiled the following migration matrix on consumer loans. The higher the risk grade the higher the default risk. If in the most recent year, the bank manager finds that the transition probability from risk grade 3 to 2 is 0.03 and to 4 is 0.18, then the bank manager should take which of the following actions to reduce concentration risk?

Risk Grade at End of Year

1
2
3
4
Risk grade at beginning of year
1
.88
.08
.02
.02
2
.10
.84
.03
.02
3
.02
.09
.78
.11

Question

Cadigal Bank has compiled the following migration matrix on consumer loans. The higher the risk grade the higher the default risk. If in the most recent year, the bank manager finds that the transition probability from risk grade 3 to 2 is 0.03 and to 4 is 0.18, then the bank manager should take which of the following actions to reduce concentration risk?

	Risk Grade at End of Year
		1	2	3	4
Risk grade at beginning of year	1	.88	.08	.02	.02
2	.10	.84	.03	.02
3	.02	.09	.78	.11

Accepted Answer

Restrict supply of loans to risk grade 3 borrowers.

Answer

Increase credit risk premium on risk 2 borrowers.

Answer

Increase supply of loans to risk grade 3 borrowers.

Answer

Increase supply of loans to risk grade 2 borrowers.

Answer

Restrict supply of loans to risk grade 1 borrowers.

Crowdly

Cadigal Bank has compiled the following migration matrix on consumer loans. The ...

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