Country Risk Management

Quality of Risk Management

Conclusion:

The quality of risk management is (strong, satisfactory, weak).

Policy

Objective: To determine whether the bank has established and effectively communicated the policies, standards, and procedures necessary to manage the country risk associated with its international activities.

1.

  1. Evaluate relevant policies to determine whether they provide appropriate guidance for the bank’s international activities. Consider:

    • Country risk tolerance, i.e., the maximum acceptable country risk rating.

    • Authorized lines of business.

    • Approved instruments and tenors.

    • Desirable and undesirable types of business.

  2. Review the process used to establish country exposure limits. Consider:

    • The role of the country risk management committee, the chief country risk management officer, country managers, and marketing staff in setting country exposure limits.

    • The process for reviewing and approving country exposure limits.

    • The process for approving exceptions to country exposure limits.

  3. Determine whether country exposure limits are well-defined and reasonable. Consider:

    • The way limits are measured. (For example, is capital or some other standard used to define the exposure limit?)

    • The relationship between assigned ratings and the bank’s system for establishing country exposure limits.

    • The use of sub-limits for different types and tenors of exposure within a country.

    • The use of regional limits as a tool for limiting the effects of a contagion of problems between countries.

    • The impact on the bank if the country exposure limit is reached.

  4. Evaluate the policy review and country exposure limit approval processes to ensure that the policy and/or exposure limits can be adjusted in response to changes in the level of country risk.

  5. Determine whether the board of directors has approved the current policies and country exposure limits.

  6. While performing the remaining procedures, evaluate whether country risk management policies and exposure limits have been clearly communicated to affected staff.

Objective: To determine whether the bank has systems in place to provide accurate and timely assessments of the country risk associated with its international activities.

1.

  1. Review the bank’s definition of country risk to determine the scope of its analyses. Is the scope based on a broadly defined concept of country risk?

  2. In light of the size and sophistication of the bank’s international activities, evaluate the adequacy of the bank’s country risk analysis process. Consider:

    • Does the bank assess the level of risk associated with each country in which it is currently conducting or planning to do business?

    • Is a formal analysis of country risk conducted at least annually, and does the bank have an effective system for monitoring developments in the interim?

    • Does the bank’s analysis take into account all aspects of the broadly defined concept of country risk, as well as any special risks associated with specific groups of counterparties the bank may have targeted in its business strategy?

    • Is the bank’s analysis adequately documented and are its conclusions concerning the level of risk communicated in a way that provides decision makers with a reasonable basis for determining the nature and level of the bank’s exposures in a country?

    • Are the resources devoted to the country risk analysis process, including the number and expertise of staff, considered adequate?

    • Do the bank’s conclusions concerning a country appear to be reasonable in light of information available from other sources?

  3. Evaluate the adequacy of the documentation supporting the bank’s country risk management decisions. Consider:

    • Whether the bank’s country risk files include (at a minimum) a recent analysis of country risk, the bank-assigned rating of country risk, authorized types of activities, and approved limits on exposure.

    • Why the bank has waived the analysis of any countries in which it is exposed (if it has done so).

  4. Evaluate the bank’s system for assigning country risk ratings. Consider:

    • The rating category definitions used.

    • Whether ratings differentiate among types of exposures (e.g., trade vs. non-trade).

    • Independence (i.e., the persons involved in the rating process do not have conflicting interests).

    • What triggers rating changes.

    • The rating review and approval process.

    • The reasonableness of the assigned ratings in light of information available from other sources, including external rating agencies and the ICERC.

    • The consistency of application across countries.

  5. etermine how the bank factors country risk ratings into its assessment of counterparty credit risk.

Personnel

Conclusion: Management (does/does not) have the knowledge and experience necessary to effectively manage the risks associated with the bank’s international activities.

Objective: To determine management’s ability to engage in international activities in a safe and sound manner.

1.

  1. Through discussions with management, ascertain its knowledge of current policies for managing the country risk associated with the bank’s international activities.

  2. Review the bank’s organization chart in conjunction with management resumes to assess the overall structure and experience of personnel responsible for managing the bank’s international activities. If no chart is available, discuss structure and experience with department management.

  3. Evaluate whether reporting lines encourage open communication and limit the chances of conflicts of interest.

  4. Evaluate the level of staff turnover and its effect on country risk management.

Objective: To determine whether the bank has systems in place to effectively monitor the level of country risk associated with its international activities.

1.

  1. Determine how compliance with country risk limits is monitored and reported to senior management and the board of directors.

  2. Assess the level of review for country exposures nearing their risk limits. Is there sufficient reporting to senior management, and is oversight heightened?

  3. Evaluate the adequacy of the system for monitoring current conditions in countries in which the bank has significant exposures. Consider:

    • The volume of exposure and the perceived level of risk in a country.

    • The types of resources used including, for example, in-country staff, periodic country visits, internal research, and external research and rating services.

  4. Evaluate the adequacy of the bank’s procedures for dealing with country risk problems. Consider whether the bank has contingency plans addressing the possibility of a serious deterioration of political or economic conditions in countries where the bank has significant exposures.

  5. Evaluate the adequacy of the management information system (MIS) for the bank’s international activities. All evaluations of MIS should assess timeliness, accuracy, level of detail, clarity of report format, and distribution channels. Consider:

    • Capital and earnings-at-risk measurements.

    • Past-due and accrual status.

    • Trend analysis.

    • Commitments, including type, amount, and level of expected usage.

    • Maturity distribution.

    • Liquidity information.

    • Exceptions to policy and country risk limits.

    • Distribution of exposures by currency.

    • Distribution of exposures by line of business.

  6. Test the accuracy of the country exposure reports received by management and the quarterly FFIEC 009 Country Exposure Report to determine whether the information received by both management and supervisors is accurate and complete.

  7. Evaluate the adequacy and flexibility of the MIS for the bank’s international activities. Consider:

    • The distribution of MIS reports.

    • The amount and suitability of information provided to each layer of management.

    • The timeliness of MIS reports.

    • Whether the reports are generated off a database that allows reporting flexibility. Can country exposure information be reported a number of ways (for example, by sector, by product, or by in-country obligor)?

    • Whether management can design its own reports so it can access the type of information about country exposure that it wants.

    • Whether reports can be developed quickly to respond to a specific need.

  8. Determine whether control functions are independent. Consider:

    • Reporting lines.

    • Budget oversight.

    • Performance evaluation.

    • Compensation plans.

    • Access to the board.

  9. Evaluate the effectiveness of the audit function in testing the bank’s system for managing country risk. Consider:

    • Scope and coverage of reviews.

    • Frequency of reviews.

    • Qualifications and independence of audit personnel.

    • Comprehensiveness and accuracy of findings.

    • Adequacy and timeliness of follow-up.

  10. If the bank uses financial modeling tools in the management of its country risk, assess the following:

    • The reasonableness of the assumptions used in the modeled scenarios.

    • How management uses the results of the modeling.

  11. Confer with the examiner analyzing the allowance for loan and lease losses (ALLL) to determine:

    • Whether required allocated transfer risk reserves have been provided.

    • Whether transfer and/or country risk has been considered and appropriately provided for in the ALLL.

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