The federal banking agencies completed guidance Friday on correspondent concentration risk, which the regulators defined as an institution's credit exposure to one borrower that is more than 25% of its Tier 1 capital.

The guidance emphasized the need for institutions to identify and monitor correspondent concentration risk, identify their level of exposure to other institutions, set prudential concentration limits and do independent analysis to assess credit and funding risk of any transaction with another institution before it occurs.

The final revised guidance also requires institutions to monitor and manage correspondent risks beyond minimum requirements when rapid change occurs in market conditions or in a correspondent's financial condition. It clarified that the credit and funding thresholds are not firm limits but indicators of a company's risk. The guidance modified the concentration threshold calculation to reflect it as a percentage of total capital rather than Tier 1 capital.

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