36. An Authorised Person should implement an effective system for monitoring its Credit Risk, which should be described in its Credit Risk policy. The system may monitor the use of facilities, adherence to servicing requirements and covenants, and monitor the value of Collateral and identify problem accounts.
37. An Authorised Person should consider the implementation of a system of management reporting which provides relevant, accurate, comprehensive, timely and reliable Credit Risk reports to relevant functions within the Authorised Person.
38. Adequacy and sophistication of Credit Risk measurement tools required depends on the complexity and degree of the inherent risks of the products involved. An Authorised Person should have information systems and analytical techniques that provide sufficient information on the risk profile and structure of the credit portfolio. These should be flexible to help Authorised Person to identify risk concentrations. To achieve this, an Authorised Person system should be capable of analysing its credit portfolio by the following characteristics:
a. size of Exposure;
b. Exposure to Groups of related borrowers;
d. sectors, e.g. geographic, industrial;
e. borrowers' demographic profile for consumer credits, e.g. age or income group, if appropriate;
f. account performance;
g. internal credit ratings;
h. outstandings versus commitments; and
i. types and coverage of Collateral.
39. An Authorised Person should have procedures for taking appropriate action according to the information within the management reports, such as a review of Counterparty limits.
40. Particular attention should be given to the monitoring of credit that does not conform to usual Credit Risk policy, or which exceeds predetermined credit limits and criteria, but is sanctioned because of particular circumstances. Unauthorised exceptions to policies, procedures and limits should be reported in a timely manner to the appropriate level of management.
41. Individual credit facilities and overall limits and sub-limits should be periodically reviewed in order to check their performance and appropriateness for both the current circumstances of the Counterparty and in the Authorised Person's current internal and external economic environment. The frequency of review will usually be more intense for higher-risk Counterparties or larger Exposures or in fluctuating economic conditions.
42. An Authorised Person should have in place a system for monitoring the overall quality of its Credit Risk Exposures under normal and stressful conditions. There should also be a reporting system which alerts management to aggregate Exposures approaching various pre-set portfolio limits.
43. An Authorised Person should be mindful of business and economic cycles and regularly stress-test their portfolios against adverse market scenarios. Adequate contingency planning should be developed in conjunction with stress-testing to address the possibility of crises developing in a very rapid fashion.
44. Appropriate stress testing of credit Exposures can be an essential part of the credit management process. Examination of the potential effects of economic or industry downturns, market events, changes in interest rates, changes in foreign exchange rates and changes in liquidity conditions can provide valuable information about an Authorised Person's Credit Risk. This information can be utilised to inform the Authorised Person's on-going credit strategy.
45. As new techniques for Credit Risk management, monitoring and reporting are developed, the Authorised Person should ensure they are tested and evaluated before undue reliance is placed upon them.
46. Where the account officer for a credit (or customer relationship manager, branch manager or similar) moves on, the incoming officer should carry out a take-over review. The review should cover inter alia the credit-worthiness of the borrowers, the adequacy of the documentation, compliance with covenants, performance of each loan and the existence and value of any Collateral.