Country Risk Management

Country Exposure Limits

As part of their country risk management process, internationally active banks should adopt a system of country exposure limits. Because the limit setting process often involves divergent interests within the bank (such as the country managers, the bank’s overall country risk manager, and the country risk committee), country risk limits will usually reflect a balancing of several considerations, including:

• The overall strategy guiding the bank’s international activities;

• The country’s risk rating and the bank’s appetite for risk;

• Perceived business opportunities in the country; and

• The desire to support the international business needs of domestic customers.

Country exposure limits should be approved by the board of directors, or a committee thereof, and communicated to all affected departments and staff. Exposure limits should be reviewed and approved at least annually―more frequently when concerns about a particular country arise.

A bank should consider whether its international operations are such that it should supplement its aggregate exposure limits with more discrete controls. Such controls might take the form of limits on the different lines of business in the country, limits by type of counterparty, or limits by type or tenor of exposure. A bank might also limit its exposure to local currencies. Banks that have both substantial capital market exposures and credit-related exposures typically set separate aggregate exposure limits for each because exposures to the two lines of business are usually measured differently.

Although country-by-country exposure limits are customary, banks should also consider limiting (or at least monitoring) exposures on a broader (e.g., regional) basis. A troubled country’s problems often affect its neighbors, and the adverse effects may also extend to geographically distant countries with close ties through trade or investment. By monitoring and controlling exposures on a regional basis, banks are in a better position to respond if the adverse effects of a country’s problems begin to spread.

For banks that are engaged primarily in direct lending activities, monthly monitoring of compliance with country exposure limits is adequate. However, banks with more volatile portfolios, including those with significant trading accounts, should monitor compliance with approved limits more frequently. Exceptions to approved country exposure limits should be reported to an appropriate level of management or the board so it can consider corrective measures.

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