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14 June 2006

Basel guidance on sound credit risk assessment and valuation for loans

The Basel Committee on Banking Supervision released a paper on “Sound credit risk assessment and valuation for loans” addressing how common data and processes related to loans may be used for assessing credit risk, accounting for loan impairment and determining regulatory capital requirements.

The paper discusses necessary processes for banks in sound credit risk assessment, valuation and control and the responsibilities of boards of directors and senior management to maintain appropriate provisions for loan losses. The paper also provides guidelines for how supervisors should evaluate the effectiveness of a bank's credit risk policies and practices when assessing the appropriateness of their credit risk assessment process, loan loss provisions and regulatory capital. It highlights provisioning concepts intended to be consistent with prudential and accounting frameworks. As noted within the paper, this supervisory guidance is not intended to set forth additional accounting requirements beyond those established by robust accounting standards.

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© Graham Bishop

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