Country Risk Management

Country Risk Analysis Process

Although the nature of the country risk analysis process and the level of resources devoted to it will vary from bank to bank, depending on the size and sophistication of the bank’s international operations, a number of considerations are relevant to evaluating the process in all banks:

• Is there a quantitative and qualitative assessment of the risk associated with each country in which the bank is conducting or planning to conduct 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 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 analysis adequately documented, and are 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?

• Given the size and sophistication of the bank’s international activities, are the resources devoted to the country risk analysis process adequate?

• As a final check of the process, are the bank’s conclusions concerning a country reasonable in light of information available from other sources, including external research and rating services and the Interagency Country Exposure Review Committee (ICERC)?

Conclusions about the level of country risk reflect an evaluation of the effect of prevailing (and possible future) economic, political, and social conditions on a country’s ability to sustain external debt service, as well as the impact of these conditions on the credit risk of individual counterparties located in the country. The appendix to this handbook section provides a more detailed description of these factors.

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