Basel Committee issues guidance on Credit Risk Management and Disclosure

The Basel Committee on Banking Supervision today issued a revised version of its guidance on credit risk management and disclosure. The paper Principles for the Management of Credit Risk specifically addresses the following areas: (i) establishing an appropriate credit risk environment; (ii) operating under a sound credit-granting process; (iii) maintaining an appropriate credit administration, measurement and monitoring process; and (iv) ensuring adequate controls over credit risk. The paper Best Practices for Credit Risk Disclosure aims to promote adequate and effective transparency of banks' credit risk profiles by providing guidance to banks on useful credit risk disclosures and discussing supervisory information needs with respect to credit risk in banks. The guidance covers credit risk in all types of banking activities, including lending, trading, investments, liquidity/funding management and asset management.

The revised guidance takes account of comments received on the consultative drafts issued in July 1999. These comments did not suggest fundamental changes to the papers, but rather enhancement of the existing recommendations. In the case of the disclosure paper, the treatment of proprietary information has been addressed. Both papers are intended to be applicable in a wide range of jurisdictions and for banking institutions of varying degrees of sophistication.

Mr Roger Cole, Chairman of the Basel Committee's Risk Management Group, noted: "Although specific credit risk management practices may differ among banks depending upon the nature and complexity of their credit activities, a comprehensive credit risk management program will address principles described in our paper. These principles should be applied in conjunction with sound practices related to the assessment of asset quality and the adequacy of provisions and reserves, which have been addressed in other recent Basel Committee documents, along with today's paper on disclosure of credit risk."

Mr Jan Brockmeijer, Chairman of the Basel Committee Transparency Group, reinforced this message, explaining: "The disclosure paper provides guidance on best practices for public disclosure of credit risk in banking institutions. The objective is to encourage banks to provide market participants and the public with the information they need to make meaningful assessments of a bank's credit risk profile. Transparency in this area is particularly important since weak credit risk management practices and poor credit quality continue to be a dominant cause of bank failures and banking crises worldwide."

In welcoming the publication of the papers, Mr William J McDonough, Chairman of the Basel Committee, stated: "These papers form an important part of our ongoing effort to provide guidance to banking institutions and supervisors worldwide on the treatment of key banking risks." He added: "The Principles embedded in these papers will form an important background for the forthcoming Committee guidance on the use of credit risk assessment methodologies and transparency under the New Capital Adequacy Framework, which we intend to publish early next year."