Bundesbank regularly performs credit inspections
Credit risk oversight,
Even though the Bundesbank regularly performs credit inspections of banks’ internal ratings
based approach (IRB), much reliance is placed on external auditors to assess non-IRB aspects
of credit risks, such as asset quality and the adequacy of loan loss provisioning. The
authorities rarely conduct on-site inspections of these areas, with BaFin typically
commissioning external auditors to perform such reviews.
Since credit risk is the primary inherent risk for the large majority of banks, it is imperative
that the German authorities have sufficient in-house expertise to identify and supervise all
aspects of credit risks, including non-IRB elements. In addition, and as recommended by the
BCBS and the FSB, 41 supervisors must be able to assess whether the output from third parties
such as external auditors can be relied upon to the degree intended. BaFin and the
Bundesbank should therefore evaluate, as part of their ongoing review of resources, the need
for strengthening their internal credit risk supervision expertise to enable them to increase the
depth and frequency of inspections in this area and enhance their quality assurance of third
party assessments of asset quality and credit provisioning processes.