Developments in credit risk management across sectors: current practices and recommendations

Significant market and regulatory developments since the 2008 financial crisis have led to changes in how banks, insurers and securities firms measure credit risk. The Joint Forum surveyed supervisors and firms in the banking, securities and insurance sectors globally in order to understand how credit risk supervision and management have changed. Fifteen supervisors and 23 firms from Europe, North America and Asia responded to the survey.

This survey provides insight into the state of credit risk management and the implications for regulatory and supervisory frameworks. It updates the Joint Forum's 2006 review: Regulatory and market differences: issues and observations. Based on its analysis of the responses and subsequent discussions with firms, the Joint Forum makes the following recommendations for consideration by supervisors.

Recommendation 1: 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.

Recommendation 2: 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.

Recommendation 3: Supervisors should be aware of the growing need for high-quality liquid collateral to meet margin requirements for OTC derivatives sectors, and if any issues arise in this regard they should respond appropriately. The Joint Forum's Parent Committees (BCBS, IAIS and IOSCO) should consider taking appropriate steps to monitor and evaluate 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.

Recommendation 4: Supervisors should consider whether firms are accurately capturing central counterparty exposures as part of their credit risk management.

Comments on this consultative document should be uploaded by Wednesday 4 March 2015. Comments will be published on the website of the Bank for International Settlements unless a respondent specifically requests confidential treatment.