Joint Forum releases credit risk mgt report

The Joint Forum has unveiled its report on credit risk management across sectors. The study according to a statement, provides insight into the current supervisory framework around credit risk, the state of credit risk management at firms and implications for the supervisory and regulatory treatments of credit risk.

The Joint Forum was established in 1996 under the aegis of the Basel Committee on Banking Supervision (BCBS), the International Organisation of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS) to deal with issues common to the banking, securities and insurance sectors, including the regulation of financial conglomerates.

The statement noted that the report was based on a survey that the Joint Forum conducted with supervisors and firms in the banking, securities and insurance sectors globally in order to understand the current state of credit risk management given the significant market and regulatory changes since the 2008 financial crisis. Fifteen supervisors and 23 firms from Europe, North America and Asia responded to the survey.

The report updates previous Joint Forum work on this topic, particularly the management of liquidity risk in financial groups (2006), and used the date of that report as the benchmark when analysing changes in the field of credit risk management. Based on its analysis of the responses and subsequent discussions with firms, the Joint Forum puts forth the following recommendations for consideration by supervisors. The report recommended among other things, that 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.

Secondly, it noted that 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. Thirdly, it further noted that supervisors should be aware of the growing need for highquality liquid collateral to meet margin requirements for OTC derivatives sectors, and if any issues arise in this regard, they should respond appropriately.