Barbados publishes credit risk management rules

By added on 04/04/2012

The Central Bank of Barbados has noted the publication of a new set of Credit Risk Management Guidelines to assist financial institutions in meeting their credit risk management obligations, reports Tax-News.

Credit risk is the current or prospective risk to earnings and capital arising from the failure of a counterparty to meet its contractual obligations. It occurs in both banking and trading book activities, encompassing loans and diverse financial instruments, including bonds, foreign exchange, derivatives, commitments and guarantees. Credit risk can result from either on- or off-balance sheet activities and is often the most significant risk some licensees face and therefore must be well managed.

The Central Bank said that due to the complexity of credit risk, management should be conducted within the context of an enterprise risk management programme, bespoke to each entity's situation.

The Central Bank said that the Guidelines dictate sound practices in credit risk management, outlining licensees' responsibility for managing and controlling exposure to credit risk and setting out the Bank’s expectations in relation to the minimum standards for sound credit risk management by all licensees.

While the structure of the Guidelines focus on the credit risk associated with lending, some aspects of the Guidelines may also be applicable to other sources of credit risk, including those incurred in investment management, the Bank said.

The Central Bank is to assess licensees' credit risk management processes against the criteria set out in the Guidelines. The Bank underscored that licensees should be able to demonstrate that they have adequate credit risk processes in place, with enforcement measures in place to punish entities with inadequate safeguards.