Credit Risk Appetite, Strategy and Credit Risk Limits

From Open Risk Manual

Credit Risk Appetite, Strategy and Credit Risk Limits

In addition to the provisions set out in the EBA Guidelines on internal governance, institutions should apply further conditions in relation to credit granting and monitoring, as set out in this section. [1]

The Credit Risk Appetite, Credit Risk Strategy and the overall Credit Risk Policy should be aligned with the institution’s overall RAF. The institution’s credit risk appetite should specify

  • the scope and focus of the Credit Risk of the institution,
  • the composition of the Credit Portfolio, including its Credit Concentration, and
  • diversification objectives in relation to business lines, geographies, economic sectors and products.


The credit risk appetite should be implemented with the support of appropriate credit risk metrics and limits. These metrics and limits should cover key aspects of the credit risk appetite, as well as client segments, currency, collateral types and credit risk mitigation instruments.

When relevant, credit metrics should be a combination of backward-looking and forward-looking indicators and should be tailored to the business model and complexity of the institution.

Institutions should ensure that the credit risk appetite and associated metrics and limits are appropriately cascaded down within the institution, including all relevant group entities and business lines and units bearing credit risk.

For the purposes of managing Concentration Risk, institutions should set quantitative internal credit risk limits for their aggregate credit risk, as well as portfolios with shared credit risk characteristics, sub-portfolios and individual borrowers.

In cases of group entities and connected clients, the limits should also account for the consolidated and sub-consolidated position and the position of the individual entities at the consolidated and sub-consolidated levels.

See Also

References

  1. EBA, Guidelines on loan origination and monitoring EBA/GL/2020/06

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