Overview

In the risk management area, the focus is on bank exposures to credit risk, market risk, risk from equity positions, and operational risk. For credit risk, which is defined as the potential losses arising from borrowers not repaying their debts, banks must provide a qualitative discussion of their risk management policies, the key definitions and statistical methods used in their risk analysis, and information on their supervisor s acceptance of their approach. The quantitative disclosures include total gross credit risk exposures after accounting for offsets and without taking account of credit risk mitigation efforts. These exposures also must be reported in disaggregated form by exposure type (such as loans or off-balance-sheet exposures), by geographic region, by industry or counterparty type, and by residual contractual maturity. Impaired loans and past-due loans also must be reported by geographic region and industry type. ^[1.]

Global exposure risk monitoring systems (GESs) are essential to portfolio risk management, facilitating loan approvals and providing information for the entire range of credit-related products. Bank managers employ exposure systems to approve facility limits, decide credit policy, review targets and controls, allocate capital, and settle on deal pricing. Sadly, credit information and monitoring systems at some banks have not kept pace with technology and Basel II. The most common causes of bank failures are unsatisfactory credit quality, inadequate management information systems, and inferior portfolio controls.

Failure to identify and recognize deterioration in credit quality in a timely manner can aggravate and prolong the problem. ^[2.]

Unless deterioration is identified...