Credit Risk Monitoring
Credit Risk Monitoring is the collection of practices used by lenders or other counterparties exposed to Credit Risk to assess the ongoing development of the borrower (obligor) credit risk profile
Institutions should have a robust and effective monitoring framework, supported by an adequate Data Infrastructure, to ensure that information regarding their credit risk exposures, borrowers and collateral is relevant and up to date, and that the external reporting is reliable, complete, up to date and timely.
The monitoring framework should enable institutions to manage and monitor their Credit Risk exposures in line with their Credit Risk Appetite, strategy, policies and procedures at portfolio and, when relevant and material, individual exposure levels.
Institutions should ensure that the credit risk monitoring framework is well defined and documented, is integrated into the institutions’ Risk Management and control frameworks, and allows all credit exposures to be followed throughout their Credit Life Cycle.
Institutions should consider, in the design and implementation of their credit risk monitoring framework, that:
- the framework and data infrastructure provide the capability to gather and automatically compile data regarding credit risk without undue delay and with little reliance on manual processes;
- the framework and data infrastructure allow the generation of granular Risk Data that is compatible and used for the institution’s own risk management purposes but can also meet the requirements of the competent authorities for regular prudential and statistical reporting, as well as for supervisory Stress Testing and crisis management purposes;
- the framework and data infrastructure ensure effective monitoring of all credit exposures and collateral, and allow the credit decision-making process to be followed;
- the framework and data infrastructure ensure that institutions maintain an appropriate time series of reporting for current exposures, new types of lending and Early Warning Indicators (EWIs) over their credit risk planning horizon.
The monitoring process should be based on a principle of follow-up action to support and result in a regular and informed feedback loop, to inform the setting/review of credit risk appetite, policies and limits.
The credit risk monitoring framework should cover the following:
- the payment behaviour of borrowers, including any deviations from the requirements of credit agreements, including late, missed or partial payments;
- credit risk associated with both the borrower and the transaction in relation to:
- credit risk per geographical location and economic sector of ultimate exposure, when applicable;
- impairments, reversals of impairments, write-offs and other decisions regarding value adjustments for a credit exposure.
The monitoring framework and data infrastructure should allow institutions to follow the credit decision-making process, including the monitoring and reporting of all credit decisions, exceptions from the credit policies, and escalations to the higher levels of credit decision- makers. To this end, within the monitoring framework, institutions should ensure the implementation and application of relevant key risk indicators that are asset type or portfolio level specific, to determine the ongoing evolving credit risk profile of the portfolios and institution.
Institutions should ensure that the credit risk monitoring framework and data infrastructure also enable a Single Customer View.
As part of credit risk monitoring and reporting, institutions should identify the relevant drivers of its aggregate credit risk as well as the credit risk in its portfolios and sub-portfolios, taking into account macroeconomic (including demographic) factors and the fact that credit risk drivers may change over time. Credit risk drivers should be measured, analysed and monitored, and the credit risk management function should report regularly the outcome of the analysis to the management body.
When monitoring credit risk, institutions should have appropriate methodologies and practices, allowing the aggregation of credit risk exposures in business lines, portfolios, sub- portfolios, products, industries and geographical segments, and support the identification of credit risk concentrations. Institutions should ensure that credit risk data and data infrastructure meet the following requirements:
- depth and breadth so that they cover all the significant risk factors - this should allow, inter alia, exposures to be grouped together in terms of shared credit risk characteristics, such as the institutional sector to which the borrower belongs, the purpose of the transaction and the geographical location of the borrower/collateral, so as to enable an aggregate analysis that allows the identification of the entity’s exposure to these significant risk factors;
- accuracy, integrity, reliability and timeliness of data;
- consistency, being based on common sources of information and uniform definitions of the concepts used for credit risk management and, when possible, accounting;
- traceability, so that the source of the information can be identified.
Institutions should ensure that operational metrics relating to credit risk governance are appropriate for their credit profile and applied proportionately. This includes any changes in the definitions of underlying lending metrics, material changes to rating scales or systems or credit risk policies/frameworks that help define/measure credit risk, and changing/altering product terms to avoid breaches of policy or exceptions.
- EBA, Guidelines on loan origination and monitoring EBA/GL/2020/06