Credit Risk

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EASTERN CARIBBEAN CENTRAL BANK

GUIDELINES ON CREDIT RISK MANAGEMENT FOR INSTITUTIONS LICENSED TO CONDUCT BANKING BUSINESS UNDER THE BANKING ACT

Prepared by the BANK SUPERVISION DEPARTMENT May 2009

TABLE OF CONTENTS

INTRODUCTION I II III IV V OVERVIEW INTERPRETATION AUTHORITY APPLICATION COMMENCEMENT 1 2 3 3 3 4 10 12 14 15

CREDIT RISK MANAGEMENT PROGRAMME ADEQUATE CREDIT RISK CONTROLS ROLE OF BOARD OF DIRECTORS LOAN SYNDICATIONS OTHER REPORTING REQUIREMENTS

INTRODUCTION

I

OVERVIEW The major cause of serious banking problems continues to be ineffective credit risk management. The provision of credit remains the primary business of financial

institutions operating within the ECCU. For this reason, credit quality is considered a primary indicator of the financial soundness of these institutions.

The objective of credit risk management is to maximize a financial institution’s riskadjusted rate of return by maintaining credit risk exposure within acceptable parameters. Credit risk management should not only effectively address the credit risk inherent in the credit portfolio, but should also consider the relationships between credit risks and other risks. The effective management of credit risk is a critical component of a

comprehensive approach to total risk management and is fundamental to the safety and soundness of financial institutions. Appropriate policies, procedures and systems should be implemented at each financial institution to effectively identify, measure, monitor and control credit risk.

The Eastern Caribbean Central Bank (ECCB) has issued these guidelines in an effort to promote the implementation of sound credit risk management at licensed financial institutions. These guidelines represent the ECCB’s minimum requirements for credit risk management and are not be viewed as all encompassing. The ECCB endorses and recommends the Basel Committee’s 17 Principles for Management of Credit Risk (September 2000).

BSD 370393v2

1

II

INTERPRETATION The following terms are defined for the purpose of these guidelines:

a)

“Financial Institution” includes any person doing banking business and all offices and branches of the financial institution in ( institution. ) shall be deemed to be one financial

b)

“Credit” is the provision of funds on agreed terms and conditions to a borrower, who is obliged to repay the amount borrowed (together with interest thereon). Credit may be extended on a secured or unsecured basis by way of loans, mortgages, bonds, private placements, derivatives and leases.

c)

“Credit risk” is the risk that a lender will suffer a financial loss as a result of a borrower’s failure to perform according to the terms and conditions of the credit or

loan agreement.
d) “Credit Risk Management” Credit Risk Management is the process of controlling the impact of credit risk-related events on the financial institution and involves the identification, understanding, and quantification of the degree of potential loss and the consequential implementation of appropriate measures to minimize the risk of loss to the financial institution. e) “Exposure” includes advances, credit facilities, guarantees, repurchase agreements agreements, swap agreements and equity investments. “Insider” has the meaning assigned to it under the Securities Act, 2001. “Non-performing loans” include loans and advances (a) that are not earning income; (b) on which (i) full payment can no longer be expected; (ii) payments are more than 90 days delinquent; (c) total credits to the accounts are insufficient to cover interest charges over a three-month period; BSD 370393v2

f) g)

2

accounts are insufficient to cover interest charges over a three-month period, or the maturity date has passed and payment has not been made.

h)

Expired accounts Accounts which remain on the books but which have passed their maturity dates.

III

AUTHORITY These guidelines are issued...
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