|BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
|DIVISION OF BANKING
SUPERVISION AND REGULATION
March 8, 2002
The Federal Reserve, along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, have issued enhanced guidance concerning the elements of an effective country risk management process for banking organizations. Country risk is the risk that economic, social, or political conditions in a foreign country might adversely affect an organization's financial condition, primarily through impaired credit quality or transfer risk.1
The interagency guidance, which is attached to this letter, builds in part on the findings of a 1998 study by the ICERC on the country risk management practices of U.S. banks (SR letter 98-33). This new guidance supplements and strengthens existing guidance with regard to country risk and is part of an ongoing effort by the agencies, through their participation in the ICERC, to ensure that banking organizations' management of risks arising from their international activities are appropriately and adequately addressed during the examination process.
Country risk can occur in many different forms, and the nature of specific risks can change over time. It is essential that a U.S. banking organization with significant direct or indirect international exposure have in place an effective country risk management process that is commensurate with the volume and complexity of its international activities. Examiners should continue to evaluate the adequacy of the country risk management process at internationally active institutions, and should augment their assessments using this new guidance. The interagency guidance makes clear that this process should include, at a minimum: effective oversight by the board of directors; adequate risk management policies and procedures; an accurate country exposure reporting system; an effective country risk analysis process; a country risk rating system; country exposure limits; ongoing monitoring of country conditions; periodic stress testing of foreign exposures; and adequate internal controls and audit function. An institution's country risk management process should give particular attention to any concentrations of country risk.
Country risk is not necessarily limited to institutions with direct international exposures. Domestic counterparties with significant economic dependence on a foreign country or region (for example, through export dependence) can pose indirect country risk to institutions that do not have direct international activity. While institutions are not required to incorporate indirect country risk into a formal country risk management process, they should nevertheless take these country risk factors into account, where appropriate, when assessing the creditworthiness of domestic counterparties. Examiners should ensure that the overall credit risk management process takes into account indirect country risk where applicable in all supervised institutions.
Reserve Banks are asked to forward this SR letter and the attached interagency guidance to all state member banks and bank holding companies supervised by the Federal Reserve in their districts. If you have any questions, please contact Michael Martinson, Associate Director, at (202) 452-3640, or T. Kirk Odegard, Supervisory Financial Analyst, at (202) 530-6225.
Attachment (577 KB PDF)
Cross-reference: SR letters 99-35 and 98-33
SR letters | 2002