BIS: New Credit Risk Management Report

The Bank for International Settlements (BIS) released its Credit Risk Management Report on June 2nd. You can find the entire report here. The report had four major recommendations which are listed below. This is just another example of the BIS issuing warnings about potential systemic risks. The IMF has issued many similar type warnings related to shadow banking, derivatives, asset bubbles, and the potential for liquidity to dry up unexpectedly in the system. Below is part of the BIS press release for the new report.

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"The report updates previous Joint Forum work on this topic, particularly The management of liquidity risk in financial groups(2006), and used the date of that report as the benchmark when analysing changes in the field of credit risk management.

Based on its analysis of the responses and subsequent discussions with firms, the Joint Forum puts forth the following recommendations for consideration by supervisors.

Recommendation 1: Supervisors should be cautious against over-reliance on internal models for credit risk management and regulatory capital. Where appropriate, simple measures could be evaluated in conjunction with sophisticated modelling to provide a more complete picture.

Recommendation 2: With the current low interest rate environment possibly generating a "search for yield" through a variety of mechanisms, supervisors should be cognisant of the growth of such risk-taking behaviours and the resulting need for firms to have appropriate risk management processes.

Recommendation 3: Supervisors should be aware of the growing need for high-quality liquid collateral to meet margin requirements for OTC derivatives sectors, and if any issues arise in this regard they should respond appropriately. The Joint Forum's Parent Committees (BCBS, IAIS and IOSCO) should consider taking appropriate steps to promote the monitoring and evaluation of the availability of such collateral in their future work while also considering the objective of reducing systemic risk and promoting central clearing through collateralisation of counterparty credit risk exposures that stems from non-centrally cleared OTC derivatives.

Recommendation 4: Supervisors should consider whether firms are accurately capturing central counterparty exposures as part of their credit risk management.

Mr Thomas Schmitz-Lippert, Chairman of the Joint Forum and Executive Director, International Policy at the German Federal Financial Supervisory Authority (BaFin), said, "The challenges and the economic environment for credit risk management have evolved considerably in the last years. This report provides important new insights into the latest developments in credit risk management against the backdrop of a reformed regulatory framework and the emergence of new risks."

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My added comments:

It's clear that the BIS is aware of certain risks to the system including reliance on inaccurate risk models, OTC derivatives, and whether or not counterparties would be able to meet their obligations. 

We have covered all these here extensively. Despite these risks being mentioned, we should not expect either the IMF or the BIS to forecast any kind of new global financial crisis. If we get one, it is doubtful we will get any advance warning from either organization. However, they will be able to say they warned us about the risks. It's not likely most people will have seen the warnings. Readers here will have though.

Added note 8-6-15: A full list of systemic risk warnings can be found on this blog page