Credit risk oversight
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 Basel Committee and the FSB,
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 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.
EU Forecast
euf:ba.18.j:22/nws-01