The board should ensure that senior management is fully capable of managing the credit activities conducted by the bank and that such activities are done within the risk strategy, policies and tolerances approved by the board. The board should also regularly (i.e. at least annually), either within the credit risk strategy or within a statement of credit policy, approve the bank’s overall credit granting criteria (including general terms and conditions). In addition, it should approve the manner in which the bank will organise its credit-granting functions, including independent review of the credit granting and management function and the overall portfolio.
While members of the board of directors, particularly outside directors, can be important sources of new business for the bank, once a potential credit is introduced, the bank’ s established processes should determine how much and at what terms credit is granted. In order to avoid conflicts of interest, it is important that board members not override the credit-granting and monitoring processes of the bank.
The board of directors should ensure that the bank’s remuneration policies do not contradict its credit risk strategy. Remuneration policies that reward unacceptable behaviour such as generating short-term profits while deviating from credit policies or exceeding established limits, weaken the bank’ s credit processes.
Principle 2: Senior management should have responsibility for implementing the credit risk strategy approved by the board of directors and for developing policies and procedures for identifying, measuring, monitoring and controlling credit risk. Such policies and procedures should address credit risk in all of the bank’s activities and at both the individual credit and portfolio levels.
Senior management of a bank is responsible for implementing the credit risk strategy approved by the board of directors. This includes ensuring that the bank’s credit-granting activities conform to the established strategy, that written procedures are developed and implemented, and that loan approval and review responsibilities are clearly and properly assigned. Senior management must also ensure that there is a periodic independent internal assessment of the bank’s credit-granting and management functions.
A cornerstone of safe and sound banking is the design and implementation of written policies and procedures related to identifying, measuring, monitoring and controlling credit risk. Credit policies establish the framework for lending and guide the credit-granting activities of the bank. Credit policies should address such topics as target markets, portfolio mix, price and non-price terms, the structure of limits, approval authorities, exception procesing/reporting, etc. Such policies should be clearly defined, consistent with prudent banking practices and relevant regulatory requirements, and adequate for the nature and complexity of the bank’s activities. The policies should be designed and implemented within the context of internal and external factors such as the bank’s market position, trade area, staff capabilities and technology. Policies and procedures that are properly developed and implemented enable the bank to: (i) maintain sound credit-granting standards; (ii) monitor and control credit risk; (iii) properly evaluate new business opportunities; and (iv) identify and administer problem credits.
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