Country Risk and Cross-Border Risk exposure

Introduction

The bank at its Group level must quantify, control and monitor the risk of lending within specific countries and territories. Controls must be in place to manage both, Country Risk, i.e., the economic risk associated with a specific country and Cross-Border Risk arising from lending to an entity located in a different country/territory and/or lending in a foreign currency.

To control and monitor Country Risk exposure and Cross-Border Risk exposure against the agreed caps and to enable reporting that provides management, stakeholders and regulators with geographic view of the Group’s aggregate credit risk exposure.

In this article, we will consider the challenges and benefits of the implementation of the Country Risk reporting, such as:

1. Definitions of Country Risk and Cross-Border Risk with examples
2. Key challenges that need to be addressed
3. Benefits coming from the implementation of Country Risk reporting.

Definitions

Country risk

Country risk quantifies exposure to the economic risk of a specific country or territory based on underlying factors including politics, economic policies and management, production, etc.

Example: Country of Risk considers payment and performance and will typically be determined by the primary repayment source of facility or where the specific entity generates most of its operating revenues.

Cross-Border Risk

Cross-Border Risk measures the risk associated with capital controls (transfer), enforcement (nationalisation and expropriation) and FX (convertibility and redenomination) risk when lending from one country or territory to an entity located in a different country or territory and/or lending to an in=country/territory entity in a foreign currency.

Country Risk and Cross-Border Risk are related but have different underlying characteristics thus, they should be treated separately.

Example: A typical example of Cross-Border Risk is where an exposure in one specific country is booked to the same country, but in currency different than the local or is booked to the different country incorporated entity, regardless of the facility currency.

Challenges

As a result of different approach and methodology, Country Risk reporting can be fragmented across different regions and jurisdiction which can lead to different standards in the way Country Risk is reported and managed.

No overarching framework or a formally agreed approach to country risk management sets the list of challenges that needs to be formulated:

• Drive the framework top-down by the board.
• Informs and aligns with group strategy.
• Defines clear roles and responsibilities at group, regional and country level.
• Covers various relevant business lines.
• Introduces a new definition of both, Country of Risk and Cross-border Risk that will be reflected in new reporting.
• Introduces a new reporting on cross-border aggregate exposure.
• Define risk appetite limits that allows to define country limits top-down and acts as formal limits for risk exposure.
• Define risk appetite thresholds that acts as tolerance threshold.

A comprehensive country risk framework should not only be limited to credit risk, but needs also cover market risk, retail credit risk, treasury risk and operational risk.

Benefits

• The new methodology which will help the Bank to set its maximum exposure to a given country over a given period.
• The streamlined process of data sourcing and consolidation.
• Data framework for sensitive and Privacy protection as a part of the reporting solution.
• Robust and consistent way of reporting Country Risk and Cross-Border Risk.
• Incorporation of all applicable business lines into one consistent end user environment.
• Efficient monitoring and allocation of Credit Risk appetite across regions, countries, business lines, products, and other possible reporting dimensions.
• The introduced measures will help to manage and control existing and future cross-border and total exposure on a country level.
• Demonstrable framework, process and risk management that satisfies PRA or any other bank supervision to whom it is applicable.

Implementation

Implementation requires multi-dimensional engagement with different stakeholders and teams, as well as flexible approach to make the requirements fully understood, translated into technical language and adopted in timely manner. Key elements of implementations are as follows:

• Current and future state analysis including assumptions and dependencies of all critical elements.
• Gap analysis to identify missing components of data, systems, data points.
• Helping to structure system architecture to support front-to-back data flow and apply cost-effective solutions.
• Requirements gathering to take business needs and reflect them in change process.
• Tech implementation to create the capability of data flow, ETL process and controls.
• Testing phase to confirm being compliant to the requirements and business needs.
• Release and support.

How Brickendon can help?

Brickendon provides the right approach and group of professionals in their domain that are focused to streamline project operations and improve your overall efficiency.

• Provide an expertise to introduce the concept to the bank and help to run and manage the project in an effective way.
• Scope of the expertise aligned to the bank needs.
• Support and coordination among different business lines and regions.
• Project management solutions and Agile way of working.
• Identify business lines as well as data assets required for Country Risk reporting.

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