While financial institutions have faced difficulties over the years for a multitude of reasons, the main cause of serious banking problems continues to be directly related to poor credit standards for borrowers and counterparties, poor portfolio management or Lack of attention to economic changes or other circumstances that may lead to a deterioration in the credit standing of a bank's counterparts. This experience is common in both the G-10 and non-G-10 countries. Credit risk is simply defined as the potential for a bank borrower or a counterparty to default on their agreed terms. The objective of credit risk management is to maximize the bank's risk-adjusted rate of return by maintaining exposure to credit risk within acceptable parameters. Banks must manage the credit risk inherent in the entire portfolio as well as the risk of individual loans or transactions. Banks should also consider the relationships between credit risk and other risks. Effective credit risk management is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organization.
For most banks, loans are the largest and obvious source of credit risk; However, there are other sources of credit risk throughout a bank's activities, including in the banking and trading portfolios, both on and off the balance sheet. Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans, including acceptances, interbank transactions, commercial financing, foreign exchange transactions, financial futures, swaps, Bonds, stocks and options. Guarantees and settlement of transactions. Since exposure to credit risk remains the main source of problems in banks around the world, banks and their supervisors must be able to draw useful lessons from past experiences. Banks must now have a clear awareness of the need to identify, measure, monitor and control credit risk, as well as to determine that they have adequate capital to deal with these risks and are adequately compensated for by the risks incurred. The Basel Committee is publishing this document to encourage banking supervisors around the world to promote sound practices for credit risk management. Although the principles contained in this document are more clearly applicable to the lending business, they should apply to all activities where credit risk exists.
The good practices outlined in this document specifically address the following areas: (i) establishing an adequate credit risk environment; (Ii) operate under a solid credit granting process; (Iii) to maintain an adequate process of administration, measurement and monitoring of credit; And iv) ensure adequate credit risk controls. While specific credit risk management practices may differ between banks depending on the nature and complexity of their lending activities, a comprehensive credit risk management program will address these four areas. These practices should also be applied in conjunction with sound practices related to asset quality assessment, adequacy of provisions and reserves and disclosure of credit risk, all of which have been addressed in other recent documents of the Basel Committee. Chosen by individual supervisors will depend on a number of factors, including their on-site and off-site supervision techniques and the extent to which external auditors are also used in the supervisory role, all Basel Committee members agree that Established principles This document should be used in the evaluation of a bank's credit risk management system. Expectations of supervision of the credit risk management approach used by individual banks should be commensurate with the scope and sophistication of the bank's activities. For smaller or less sophisticated banks, supervisors must determine that the credit risk management approach used is sufficient for their activities and that they have instilled sufficient risk-return discipline into their credit risk management processes.