The Joint Forum has published a report entitled Developments in credit risk management across sectors: current practices and recommendations.

The purpose of the report is to provide updated information and analyses of key credit risk management issues discussed in the Joint Forum’s 2001 and 2006 reports. In particular, four broad matters related to credit risk management for financial firms in the banking, securities and insurance sectors, as well as in financial conglomerates, are being addressed:

  • regulatory changes related to credit risk developed / implemented by supervisors since 2006;
  • credit risk issues that firms across the banking, securities and insurance sectors currently face;
  • developments in the evaluation and management of credit risk since 2006, including the aggregation of credit risk on a cross-sectoral basis; and
  • cross-sectoral implications that can be drawn for supervisory and regulatory treatments of credit risk.

In the report the Joint Forum sets out four recommendations for consideration by supervisors:

  • supervisors should be cautious against over-reliance on internal models for credit risk management and regulatory capital. Where appropriate, simple measures could be evaluated in conjunction with sophisticated modelling to provide a more complete picture;
  • with the current low interest rate environment possibly generating a “search for yield” through a variety of mechanisms, supervisors should be cognisant of the growth of such risk-taking behaviours and the resulting need for firms to have appropriate risk management processes;
  • supervisors should be aware of the growing need for high-quality liquid collateral to meet margin requirements for over-the-counter (OTC) derivatives sectors, and if any issues arise in this regard they should respond appropriately. The Joint Forum’s parent committee should consider taking appropriate steps to promote the monitoring and evaluation of the availability of such collateral in their future work while also considering the objective of reducing systemic risk and promoting central clearing through collateralisation of counterparty credit risk exposures that stems from non-centrally cleared OTC derivatives; and
  • supervisors should consider whether firms are accurately capturing central counterparty exposures as part of their credit risk management.

View Joint Forum releases report on credit risk management across sectors, 2 June 2015