Country Risk Management

Country Risk Ratings

Country risk ratings summarize the conclusions of the country risk analysis process. The ratings are an important component of country risk management because they provide a framework for establishing country exposure limits that reflect the bank’s tolerance for risk.

Because some counterparties may be more exposed to local country conditions than others, it is a common and acceptable practice for banks to distinguish between different types of exposures when assigning their country risk ratings. For example, trade-related and banking sector exposures typically receive better risk ratings than other categories of exposure because the importance of these types of transactions to a country’s economy has usually moved governments to give them preferential treatment for repayment.

The risk rating systems of some banks may also differentiate between public sector and private sector exposures. And in some banks, a country’s private sector credits cannot be rated less severely than its public sector credits (i.e., the bank imposes a “sovereign ceiling” on the rating for all exposures in a country). Both are acceptable practices.

A bank’s country risk ratings may differ from the ICERC-assigned transfer risk ratings because the two ratings differ in purpose and scope. A bank’s internally assigned ratings help it to decide whether to extend additional credit, as well as how to manage existing exposures. Such ratings should, therefore, have a forward-looking and broad country risk focus. The ICERC’s more narrowly focused transfer risk ratings are primarily a supervisory tool to identify countries where concentrations of transfer risk might warrant greater scrutiny and to determine whether some minimum level of reserves against transfer risk should be established.

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