Credit risk (including counterparty credit risk) is the risk of a counterparty failing to perform its obligations. Over the years, the nature, scale and complexity of credit risk undertaken by financial institutions have evolved amid significant transformation to the Malaysian financial landscape. Robust credit risk management therefore continues to be an integral component of the long-term viability of any financial institution. At a broader level, this is also critical for the sustainable development of the real economy by supporting financial intermediation and contributing towards containing the build-up of credit risks in the financial system.
While the board and senior management play a key role in credit risk oversight, the responsibility for credit risk management is spread throughout a financial institution. In particular, business lines are primarily responsible for managing credit risks inherent in day-to-day activities, such as where credit officers evaluate customers for potential credit opportunities.
Meanwhile, the risk management function serves to provide an independent and where appropriate, countervailing perspective on credit risk management issues, including credit decisions and overall credit quality. These arrangements are in turn supported by an internal audit function that provides assurance on the quality and effectiveness of the institution’s internal controls, systems and processes for credit risk oversight.
A comprehensive approach to managing credit risk is important, encompassing both on- and off-balance sheet activities, capturing sources of credit risk beyond those relating to the provision of finance, such as through the purchase of debt securities, and entering into securities financing transactions and derivatives contracts. This also entails a sound understanding of the inter-linkages between credit risk and other risks. For example, credit risks arising from cross-border lending are interlinked with country and transfer risks, thereby requiring an enhanced understanding and ongoing monitoring of country-specific factors. Adverse trends in financial markets, including interest rate movements, can also impair the creditworthiness of issuers of debt securities. In addition, relevant considerations under accounting standards, such as considerations on classification, measurement and impairment, must be taken into account and be well-integrated with credit risk management practices of the financial institution.
This policy document seeks to ensure that credit risk management practices of financial institutions remain effective moving forward, amid the increased size and diversity of product offerings by financial institutions, greater internationalisation of the financial system, as well as the growing role of domestic capital markets. These expectations and requirements complement Risk Governance which sets out the overarching principles for sound risk management.
Financial institutions are required to implement, at the minimum, the standards set out in this policy document, and are expected to demonstrate to the Bank that their risk management arrangements are operating effectively and remain commensurate with the size, nature, complexity and risk profile of their institution.
This document belongs to Bank Negara Malaysia (BNM). Full access to the original source is available here: https://www.bnm.gov.my/banking-islamic-banking
