Country Risk Management

Overview

In recent years, the international exposures of the U.S. banking system have become increasingly concentrated in a relatively small number of banking institutions. These institutions, which are the most susceptible to the effects of country risk, can be divided into three main groups:

• A very small number of very large money center banks operating as truly multinational financial institutions and providing a full range of banking products and services through an international network of branches and affiliates.

• A number of other (many of them relatively large) banks and federal branches of foreign banks whose foreign exposures are primarily a reflection of the international financing needs of their domestic, corporate clients.

• Relatively small institutions, which make up the largest number of U.S. banks and federal branches of foreign banks with international exposures. Many of them have close ties to (and focus their efforts on) a particular geographic area, such as Latin America, Asia, or the Middle East.

This booklet discusses the basic elements of the country risk management process and provides risk-focused examination procedures for evaluating the adequacy of that process in internationally active banks. However, because the population of banks that are affected by country risk is so diverse, examiners must use judgment in applying these procedures to a particular bank, and should calibrate their expectations for the country risk management process to the size of the bank, as well as the volume and complexity of its international activities.

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