Recently, the NFRA issued the Jin Gui [2023] No. 12 document - Notice on the issuance of the "Measures for the Country-by-Country Risk Management of Banking Financial Institutions" (hereinafter referred to as the "Measures"), adjusting the relevant management requirements for country-specific risk management from "guidelines" to "measures". With the globalization of the financial market, while promoting global cross-border investment activities, cross-border trade and other financial activities to be more convenient and liberalized, the global financial risk factors are becoming increasingly complex, diversified, concealed and contagious.
In addition to adjusting the "Guidelines" to "Measures" in the name, the Measures have also been revised and improved in the following aspects.
1. In accordance with the principle of comprehensive risk coverage, further clarify the measurement of country-specific risk exposure.
（一）Effective monitoring by the board of directors and senior management
The Measures put forward more detailed and specific requirements for the main responsibilities of the board of directors, senior management and other departments of financial institutions in the country-specific risk management system, so as to achieve better monitoring, implementation and formulation of country-specific risk management policies that are more in line with their own institutions.
（二）Improve country-specific risk management policies and procedures
According to the nature, scale and complexity of the cross-border business of each banking financial institution, the content of the country-specific risk management policy should mainly include:
1. Cross-border business strategy and the types of country-specific risks to be bore;（三）Well-established country-specific risk identification, measurement, monitoring and control processes
1.Country-specific risk assessment and identification
In the assessment of country risks, banking financial institutions should fully consider the following qualitative and quantitative factors of a country or region, so as to be able to update the risk assessment of the country or region in a more timely and accurate manner:
2.Country-by-country risk measurement
1）Measurement method
Banking financial institutions with high exposure to country risks
The Measures stipulate that an appropriate measurement method shall be selected according to the type of country-specific risk, the scale and complexity of the exposure, and at least meet the following requirements:At the same time, internal and external resources can also be reasonably used to carry out country risk assessment and rating, and independent judgment can be made on this basis.
For banking financial institutions with low country-specific risk exposure, they can mainly use external resources to carry out country-specific risk assessment and rating, but they should also make independent judgments in the end.
2）Measurement basis - internal rating system
The Measures require banking financial institutions to establish a formal internal rating system for country risk and regularly carry out country risk ratings at least five levels (see the figure below for specific standards), so as to reflect the results of country risk assessment, and make corresponding country risk provisions on this basis.
3）Metering Parameters – Quota Management
On the basis of comprehensive consideration of factors such as cross-border business development strategy, country risk rating and their own risk appetite, the Measures require banking financial institutions to reasonably set country risk limits covering on- and off-balance sheet items according to country. In addition, banking financial institutions with significant country-specific risk exposure also need to consider setting classification limits according to business type, customer or counterparty type, country-specific risk type and term under the general limit, and refine the upper limit of risk exposure under various circumstances, so as to complete the avoidance of various risks in a targeted manner.3.Monitoring mechanisms
Establish a monitoring mechanism commensurate with the scale of country-specific risk exposure
Banking financial institutions can make full use of internal and external resources to carry out monitoring, including requiring their overseas institutions to provide country risk status reports, regularly visiting relevant countries or regions, obtaining relevant information from rating agencies (Moody's, Standard & Poor's, Fitch International, etc.) or other external institutions, monitoring risks by country at the level of single legal person and group consolidation, and properly keeping all monitoring information in the country risk assessment file.Establish country-specific risk stress testing methods and procedures that are appropriate to the scale and complexity of country-specific risk exposures
Regularly test the potential impact of different hypothetical scenarios on the country-specific risk profile to identify potential risks at an early stage, formulate country-specific risk management contingency plans based on the test results, deal with risk exposures to distressed countries or regions in a timely manner, and clarify the risk mitigation measures that should be taken under a specific risk profile.（四）Sound internal controls and audits
In order to ensure that the country-specific risk management policies and limits are effectively implemented and complied with, and the relevant functions are appropriately separated, banking financial institutions should establish a sound internal control system for country-specific risk management, and the bank's internal audit department also needs to conduct an independent review of the effectiveness of the country-specific risk management system on a regular basis to ensure the timeliness and accuracy of country-specific risks.In response to this issue, the amendments include country-by-country risk provisions under owners' equity as part of general provisions to deal with unexpected losses.
According to the classification standards of country-specific risks, the classification of low and low risks no longer provides for country-specific risks, and sets a provision ratio of not less than 5%-40% for medium-level and above country-specific risks. At the same time, it is stipulated that if the banking financial institutions are generally fully prepared and meet the relevant bottom line requirements of the Ministry of Finance, they can be regarded as sufficient national reserves and do not need to be added. These adjustments have relatively reduced the burden on banks to conduct transactions with overseas counterparties, released some capital, and benefited banks with more overseas stock transactions.
Judging from the "Measures" issued this time, the supervision has put forward higher requirements for the identification, measurement, monitoring and control of country-specific risks. It also prompts the banking financial institutions to establish a complete and reliable management information system according to their own characteristics when responding to today's complex international situation, and its functions should include:
1. Help identify high-risk and suspicious customers and their transactions;
