BoM Revises Guidelines on ECAI Use and Cross-Border Exposure of Banks
BoM recently revised a couple of guideline documents for banks and signed a memorandum of understanding (MoU) with BSP, the central bank of Philippines. The MOU, which took effect on March 01, 2021, covers cooperation in the development of banking and payment systems, fintech, cybersecurity, and sustainable central banking. One of the published guidelines addresses revisions to BoM's approach to the recognition process of External Credit Assessment Institutions (ECAIs) and the use of eligible ECAIs by banks, including as part of the standardized approach to credit risk; the revised guideline shall become effective as from April 01, 2021. The other revised guideline addresses certain requirements that banks would need to be follow in respect of their cross-border exposure.
This guideline on recognition and use of ECAIs covers the recognition of ECAIs, the principles for consistent use of credit assessments of ECAIs, and the use of Export Credit Agencies (ECAs). The guideline sets out minimum requirements for each of the six eligibility criteria for recognition of ECAIs, including objectivity, independence, international access/transparency, disclosure, resources, and credibility. Only the credit assessments of eligible ECAIs shall qualify for the standardized approach to credit risk. BoM can use both direct and indirect recognition methods for ECAIs. An application to recognize an ECAI may be initiated by a bank intending to use its ratings under the standardized approach to credit risk, or by an ECAI itself. The BoM guideline on standardized approach to credit risk permits banks to use consensus country risk scores of ECAs to determine risk-weights for claims on sovereigns, in cases where countries are not rated by eligible ECAIs. BoM has not set up a recognition process for ECAs equivalent to the one required for ECAIs. However, ECAs must publish their consensus country risk scores and subscribe to the Organization for Economic Cooperation and Development (OECD)-agreed methodology, for these to qualify for calculating capital requirements under the standardized approach to credit risk.
The guideline on cross-border exposure provides a risk-based management framework to mitigate the key cross-border banking risks. BoM has issued several guidelines in respect of the identification, measurement, management, and mitigation of credit risk. These include the guideline on country risk management, the guideline on credit risk management, and the guideline on credit concentration risk. The guideline on cross-border exposure supplements these existing guidelines and provides a set of additional minimum standards that would need to be followed by banks in respect of their cross-border exposure. With respect to regulatory reporting, the guideline specifies that a bank shall immediately inform BoM when the bank is affected by a material increase in underlying risks such as credit, legal, or reputational risks in connection with its cross-border exposure or is approached by foreign authorities regarding such matters. BoM stipulates that banks shall fully implement the requirements of this guideline within three months from its effective date.
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Keywords: Middle East and Africa, Mauritius, Banking, Credit Risk, Standardized Approach, Credit Ratings, ECAIs, Regulatory Capital, Basel, Cross-Border Exposures, Basel, BoM
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