Statement of Guidance on Country and Transfer Risk Management by Banks

Summary

This is a CIMA Statement of Guidance addressed to banks licensed in the Cayman Islands, setting out supervisory expectations for managing country and transfer risk arising from cross-border lending and investment activities. It explains the different types of country risk and describes how CIMA will assess whether a bank's country risk management framework and provisioning levels are adequate, having regard to the size and complexity of its cross-border business.

• Types of country risk: Sovereign, transfer, contagion, currency, indirect and macroeconomic risk.
• Board and senior management oversight: Expected practices for governance of country risk.
• Written policies and procedures: Expected documentation of country risk management practices.
• Prudent lending principles: Standards for lending to overseas borrowers.
• Staffing and organisational arrangements: Expected structures to support country risk management.
• Country risk analysis and monitoring: Expected ongoing assessment and tracking of country risk.
• Country risk provisioning: Including criteria for accepting parent company guarantees in lieu of provisions and treatment of such provisions for capital adequacy purposes.

The guidance references Basel Committee Core Principle 11 as the supervisory basis for CIMA's approach. As a Statement of Guidance rather than a binding rule, it describes the standards CIMA expects banks to meet and the factors CIMA will consider in its supervisory review, rather than imposing rigid, prescriptive rules with fixed deadlines. Branches of foreign banks are addressed specifically regarding reliance on group-level risk management and location of provisions.

Key obligations

• Banks should maintain adequate systems, expertise and provisions to manage cross-border/country risk exposures, commensurate with the size, nature and complexity of such exposures.
• Banks should have a clearly defined, written country risk management and provisioning policy approved by the Board, Credit Committee or senior management under delegated authority.
• The Board of Directors should regularly review the bank's country risk exposures and be promptly informed of significant changes in a country's conditions where the bank has substantial exposure there.
• The country risk policy should be reviewed at least annually to ensure it remains appropriate.
• Senior management is responsible for monitoring implementation of the policy and developing supplementary procedures as needed.
• Banks should ascertain the identity and ultimate ownership of borrowers and obtain written evidence of shareholder structure where appropriate, and should not lend on inadequate information or based solely on borrower name/status or government direction.
• Banks should conduct due diligence and ensure borrowers have sufficient foreign currency assets/income to service foreign currency obligations.
• Banks should ensure compliance with statutory procedures and obtain appropriate legal advice before accepting overseas collateral.
• Banks should dedicate adequate resources and competent staff to country risk management, and functions of analysing risk, setting limits and monitoring exposures should be independent of business development.
• Banks should maintain formal, centralised country risk analysis files with specified contents.
• Banks should establish country risk provisioning policies specifying criteria and methodology for provisions, and agree material provisions with external auditors.
• Cayman Islands branches wishing to hold provisions at head office, or subsidiaries relying on parent guarantees instead of provisions, must notify the Authority and meet specified guarantee acceptance criteria (including notifying the Authority of material changes to guarantor's ability to honour the guarantee).
• Banks relying on guarantees in lieu of provisioning must disclose this fact in their annual accounts in the Cayman Islands.
• Provisions earmarked against country risk should not be included in the bank's capital base for capital adequacy calculations.

Applies to

banks, branches of foreign banks, locally incorporated banks that are subsidiaries of foreign banks

Deadlines

• annually: The bank's country risk management and provisioning policy should be reviewed at least annually to determine if it remains appropriate.