COUNTRY RISK MANAGEMENT

The Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency have recently agreed on a joint statement addressing "Sound Risk Management Practices" for country risk. The statement, which is attached, describes the elements of an effective country risk management process.

Country risk, which has an overarching effect on a bank's international activities, is the risk that economic, social and political conditions in a foreign country might adversely affect a bank's financial interests. Country risk should explicitly be taken into account in the risk assessment of all exposures (including off-balance sheet exposure) to all public- and private-sector foreign-domiciled counterparties. There are also situations in which the creditworthiness of domestic counterparties may be affected by country risk (e.g., when the borrower has significant foreign receivables).

Country risk is not limited solely to credit transactions. Investments in foreign subsidiaries, electronic banking agreements, and EDP (electronic data processing) servicing and other outsourcing arrangements with foreign providers all carry with them the risk that policies or conditions in a foreign country may have adverse consequences for the bank.

It is essential that banks with significant international exposure have an effective country risk management process in place that is commensurate with the volume and complexity of their international activities. The interagency statement makes clear that this process should include, at a minimum:

• effective oversight by the board of directors,
• adequate risk management policies and procedures,
• an accurate country exposure reporting system,
• an effective country risk analysis process,
• a country risk rating system,
• country exposure limits,
• regular monitoring of country conditions,
• periodic stress testing of foreign exposures, and
• adequate internal controls and an effective audit mechanism.

Examiner guidance based on the principles set forth in the statement will be issued separately by each of the agencies.

For more information, please contact your FDIC Division of Supervision regional office or Louis Scalza, Review Examiner, at (202) 898-3749.

Michael J. Zamorski

Director

Attachments: Sound Risk Management Practices 

Distribution: FDIC-Supervised Banks (Commercial and Savings)

NOTE: Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 801 17th Street, NW, Room 100, Washington, DC 20434 (800-276-6003 or (703) 562-2200).