The Basel Committee on Banking Supervision today will issue papers proposing global standards for credit risk.
One paper, "Best Practices for Credit Risk Disclosure," recommends 24 ways for banks to help investors and other market players judge asset quality.
A second, "Principles for the Management of Credit Risk," offers 17 risk-reduction practices that banks are advised to adopt. Both drafts are part of a four-document package being released today.
"Exposure to credit risk continues to be the leading source of problems in banks," said Roger Cole, an associate director for supervision at the Federal Reserve Board and co-chairman of Basel's risk management subcommittee.
Many of the recommendations in the credit management paper will be familiar to U.S. banks and foreign banks that do business here, Mr. Cole said. But the principles "need to be continually emphasized."
The paper advises banks to set overall credit limits for individual borrowers and counterparties. It also recommends that banks install a system for monitoring the condition of, and provisioning for, individual credits.
Banks are further advised in the paper to consider the possibility of stressful changes in the economy when assessing the risks of individual credits and whole portfolios.
The "Best Practices" paper concerns disclosures on all types of credit, including loans, securities, and derivatives. The document builds on a bank transparency report the committee issued in September.
"U.S. banks are well ahead of the game in terms of the quantity and quality of disclosures," said Susan Krause, senior deputy comptroller for international affairs and chairwoman of Basel's transparency subcommittee.
By contrast, she said, "there are a lot of countries where the disclosure practices are quite inadequate," especially those in emerging markets. "It's up to banks themselves to go beyond their minimum requirements."
For example, the paper on disclosure says, multinational banks should issue separate descriptions of the credit risks they face in each geographic area, not a single, bankwide disclosure.
Similarly, banks should disclose their credit risks by industry, counterparty type, and business line, the paper says.
The Basel study also instructs financial institutions to disclose their credit scoring and credit risk measurement tools, their credit risk mitigation techniques, and any use of derivatives.
"Depositors, investors, creditors, and counterparties can make intelligent decisions as long as they're wellinformed," Ms. Krause said.
The Basel Committee is expected to issue "Supervisory Guidance for Managing Settlement Risk in Foreign Exchange Transactions" today. It recommends that banks have a formal process for handling settlement risk. Comments on this and the aforementioned two papers are due Nov. 30.
The fourth paper, "Sound Practices for Loan Accounting and Disclosure," is the final version of a draft issued for comment last October and is not expected to have much impact on U.S. banks.