The Joint Forum has released a report on credit risk management, suggesting corporates should pay more attention to counterparty exposures and high-risk investments as part of their credit risk policy.

An international financial regulatory group – the Joint Forum – has released a report on credit risk management. The Joint Forum brings together financial regulatory representatives from banking, insurance and securities. The report, Developments in credit risk management across sectors: current practices and recommendations, provides insight into the current supervisory framework around credit risk, the state of credit risk management at firms and implications for the supervisory and regulatory treatments of credit risk.

The report's recommendations have several implications for corporate treasury, as follows:

• Corporates need to have an appropriate risk management framework in place, particularly in light of the low interest-rate environment, which is pushing companies to look for higher yields through higher risk-bearing instruments.
• Corporates should pay attention to capturing central counterparty exposures as part of their credit risk management policy.

The report makes the following four recommendations to financial supervisory authorities:

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.
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.
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 stem from non-centrally cleared OTC derivatives.
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.”

The report is based on a survey that the Joint Forum conducted with supervisors and firms in the banking, securities and insurance sectors globally in order to understand the current state of credit risk management given the significant market and regulatory changes since the 2008 financial crisis. Fifteen supervisors and 23 firms from Europe, North America and Asia responded to the survey.