Principles for the Assessment of Banks’ Management of Credit Risk
A. Establishing an appropriate credit risk environment
Principle 1: The board of directors should have responsibility for approving and
periodically reviewing the credit risk strategy and significant credit risk policies of the
bank. The strategy should reflect the bank’s tolerance for risk and the level of
profitability the bank expects to achieve for incurring various credit risks.
Principle 2: Senior management should have responsibility for implementing the credit
risk strategy approved by the board of directors and for developing policies and
procedures for identifying, measuring, monitoring and controlling credit risk. Such
policies and procedures should address credit risk in all of the bank’s activities and at
both the individual credit and portfolio levels.
Principle 3: Banks should identify and manage credit risk inherent in all products and
activities. Banks should ensure that the risks of products and activities new to them are
subject to adequate procedures and controls before being introduced or undertaken,
and approved in advance by the board of directors or its appropriate committee.
B. Operating under a sound credit granting process
Principle 4: Banks must operate under sound, well-defined credit-granting criteria.
These criteria should include a thorough understanding of the borrower or
counterparty, as well as the purpose and structure of the credit, and its source of
Principle 5: Banks should establish overall credit limits at the level of individual
borrowers and counterparties, and groups of connected counterparties that aggregate in
a comparable and meaningful manner different types of exposures, both in the banking
and trading book and on and off the balance sheet.
Principle 6: Banks should have a clearly-established process in place for approving new
credits as well as the extension of existing credits.
Principle 7: All extensions of...