Risk Management Manual of Examination Policies - FDIC

INTERNATIONAL BANKING Section 11.1
country studies, representative office, officer visits to the
home country central bank or correspondent bank, as well
as nationally recognized statistical rating organizations
(NRSRO) may be useful sources of information. For
instance, Foreign/Local Currency Ceiling Ratings for the
Sovereign, Foreign /Local Currency Deposit Ratings for
Banks, and Bank Financial Strength Ratings (including
credit watch events and outlook changes positive-negative)
could be effectively employed.
Such information should serve to stimulate discussion and
assessment at senior management levels as to the scope and
nature of the bank’s current exposure and whether
reductions are necessary. Once exit strategies are
employed, monthly or quarterly reporting should be
provided to the bank’s board of directors to update the
board on the ongoing nature of exposure and progress
towards reducing and/or limiting risk.
Transfer Risk
Transfer risk is a facet of country risk. Transfer risk is the
possibility that an asset cannot be serviced in the currency
of payment because the obligor’s country lacks the
necessary foreign exchange or has put restraints on its
availability.
In general, transfer risk is relevant whenever a bank
extends credit across international borders and the
extension of credit is denominated in a currency external to
the country of residence of the obligor. In these
circumstances, an obligor must, in the absence of the
ability to earn and/or borrow and retain foreign currency
outside the country of residence, obtain the foreign
currency needed to service an obligation from the central
bank of the country. Where a country is beset by
economic, political, or social turmoil leading to shortages
of foreign currencies at the central bank, the borrower may
be unable to obtain the foreign currency and thus default
on the obligation to the lending bank or, alternatively,
request a restructuring of the debt.
Although a bank’s country risk management program must
be based on the broadly defined concept of country risk,
the Federal banking agencies use transfer risk as a tool to
consistently assign classifications and other designations to
cross-border exposures, determine minimum reserve
requirements on cross-border exposures, and measure
cross-border concentrations.
Interagency Country Exposure Review Committee
The ICERC is responsible for providing the uniform
transfer risk designations to be used in the Federal banking
agencies’ reports of examination. Aided by balance of
payments statistics, studies of country conditions and
information from other sources, the committee reaches
decisions on the extent of transfer risk posed by underlying
economic, political and social circumstances in countries
where U.S. bank exposure meets the committee’s review
criteria. Where appropriate, the committee prepares a
standard narrative on the country to be used in reports of
examination. Refer to the 1998 Guide to the Interagency
Country Exposure Review Committee for a detailed
explanation of the ICERC program.
Transfer Risk Classifications and Designations
When a country is experiencing political, social, or
economic conditions leading to an interruption in debt
servicing by obligors within the country or when an
interruption in payments appears imminent, credits within
the country will be designated as Other Transfer Risk
Problems (OTRP), or will be adversely classified using the
designation of Substandard, Value Impaired, or Loss.
Lesser degrees of transfer risk are identified by the transfer
risk designations Strong, Moderately Strong, and Weak.
ICERC is responsible for providing the uniform transfer
risk classifications and designations. The appropriate
criteria for including transfer risk classifications and
designations in the Report of Examination are discussed in
the Report of Examination instructions. See the 1998
Guide to the Interagency Country Exposure Review
Committee for the definitions of the classifications and
designations. Examiners can find ICERC’s transfer risk
designations and write-ups on the International and Large
Bank Branch website in the FDIC Intranet.
Contingent liabilities subject to transfer risk (including
commercial and standby letters of credit as well as loan
commitments) that will result in a concomitant increase in
bank assets if the contingencies convert into an actual
liability should also be considered for special comment or
classification, as applicable. Contingent liabilities
extended for classification should be classified according
to the type and tenor of the bank asset which would result
from conversion of the contingency into an actual liability.
For example, commercial import/export letters of credit
would be accorded the same classification as trade
transactions, while commitments to fund long-term project
loans would be accorded the same classification as longterm
loans. In cases where type or tenor is not easily
discernible and where exposure is accorded a split
classification, the more severe classification should prevail.
Transfer Risk Reserve Requirements
The Federal banking agencies are directed by International
Lending Supervision Act of 1983 (ILSA) to require banks
International Banking (12-04) 11.1-4 DSC Risk Management Manual of Examination Policies
Federal Deposit Insurance Corporation