Which method is used for managing credit risk by limiting exposure through borrower or counterparty limits?

The correct answer encompasses the concept of how managing credit risk often involves various strategies, including the establishment of borrower or counterparty limits. Each method listed plays a role in a comprehensive risk management framework.

Collateral serves as a safety net, providing lenders with a form of security in the event that a borrower defaults. By requiring collateral, financial institutions can limit their risk exposure because they have a claim to specific assets.

Marking to market is an essential practice in risk management that involves adjusting the valuation of an asset or liability to reflect current market conditions. This method helps institutions gauge their actual exposure to credit risk at any given moment, ensuring that appropriate limits can be set based on real-time data.

Minimum credit standards are guidelines set by lenders to evaluate the creditworthiness of borrowers. By implementing stringent credit standards, institutions can reduce the likelihood of extending credit to high-risk individuals or entities, effectively limiting their exposure.

Together, these methods form a comprehensive approach to managing credit risk, highlighting the importance of setting and adhering to limits on exposure regarding borrowers or counterparties. This multi-faceted strategy is critical for maintaining the stability and sustainability of financial institutions in an ever-changing market environment.