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OCC Bulletin 2002-10 | March 11, 2002

Country Risk: Sound Risk Management Practices


Chief Executive Officers of National Banks, Department and Division Heads, and All Examining Personnel

As of February 12, 2016, this guidance applies to federal savings associations in addition to national banks.*

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation have jointly issued the attached statement on "Sound Risk Management Practices" for country risk. This statement describes the elements of an effective country risk management process. These principles will guide examiners when they evaluate the management of country risk in internationally active banks.

This guidance builds on the findings of a 1998 Interagency Country Exposure Review Committee (ICERC) study on the country risk management practices of U.S. banks and supplements and strengthens existing examination guidance. The guidance is part of an ongoing effort by the agencies, through their participation in the ICERC, to ensure that banking organizations adequately manage the risks arising from their international activities.

Country risk is the possibility that economic, social, and political conditions and events in a foreign country might adversely affect the interests of a financial institution.

Banks should incorporate country risk into their assessment of the credit risk associated with both on- and off-balance-sheet exposures to all foreign counterparties. In some situations, the creditworthiness of a U.S. borrower or guarantor, or the value of collateral on a domestic loan, may also be affected by events in a foreign country.

Country risk is not limited to credit transactions. It can affect investments in foreign subsidiaries, electronic banking agreements, and electronic data processing and other outsourcing arrangements with foreign providers.

Banks with significant international exposures should have a country risk management process that is adequate to support the nature, volume, and complexity of their international activities. The country risk management process should include: effective oversight by the board of directors; appropriate risk management policies and procedures; an accurate country exposure reporting system; an effective country risk analysis process; a country risk rating system; country exposure limits; ongoing monitoring of country conditions; periodic stress testing of foreign exposures; and adequate internal controls and an audit mechanism.

The guidance contained in the interagency statement, along with detailed examination procedures, was previously issued in the Comptroller's Handbook booklet on "Country Risk Management," which was published in October 2001.

For further information, please contact the International Banking and Finance Division at (202) 649-6550.

Nancy A. Wentzler
Deputy Comptroller for Global Banking and Financial Analysis

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*References in this guidance to national banks or banks generally should be read to include federal savings associations (FSA). If statutes, regulations, or other OCC guidance is referenced herein, please consult those sources to determine applicability to FSAs. If you have questions about how to apply this guidance, please contact your OCC supervisory office.