red blue led lights


Enhancing credit risk management

News and updates to help inform your credit risk strategy

Credit risk arises from the potential that a borrower or counterparty will fail to perform an obligation. Financial institutions should practice sound credit risk management strategies to mitigate their credit risk. This page provides news and updates to help inform financial institutions’ credit risk strategy.

Agencies update guidance on credit risk review systems | June 26, 2020

On May 8, 2020, the Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) (collectively, the US bank regulatory agencies) provided the banking industry (banks, savings associations, and credit unions, regardless of asset size) updated interagency guidance on credit risk review systems. This guidance is principle-based and outlines a set of practices to be used within a dedicated unit or credit review function or by multiple units across an institution to form a credit risk review system, consistent with safe and sound lending practices. What is noteworthy is the timing of the release and the signaling by the regulators for institutions to remain laser-focused on credit quality.

Credit risk review systems will vary based on an institution’s size, complexity, loan types, risk profile, and risk management practices, and in larger or more complex institutions, a dedicated credit review function will be in place. The interagency guidance elevates the status of the credit review function through the following principles:

  • Should be separate from internal audit. The credit review function is an independent function primarily responsible for validating and, if necessary, adjusting credit risk ratings and is not intended to be performed by an institution’s internal audit function. An effective internal audit function maintains the ability to independently audit the credit review function and end-to-end credit processes. Consistent with broad US bank regulatory safety and soundness standards, the credit review function should report directly to an institution’s board of directors (BoD) or a designated board committee.
  • Mandate is different from monitoring, managing, and reporting by other credit risk functions. The purpose of the credit review function is to identify in a timely and accurate manner credit weaknesses, which then informs management of how to best risk-manage their portfolio of credit exposure.
  • Prevails where a risk rating discrepancy exists. Due to its independence, risk-rating decisions made by the credit risk function should prevail over the business, unless material information can be produced by the business to support their position, which then still must be reviewed and challenged by the credit risk review function.
  • Should be empowered to evaluate workout plans specific to the assessment of the reasonableness of strategies. The credit review function should determine the appropriateness or reasonableness of assumptions regarding loss estimation for credits with significant weaknesses.

Learn more about the finalized guidance, including key considerations for banks, in our latest article.

Agencies update guidance on credit risk review systems

Let’s talk

Michele Crish
Managing director | Risk & Financial Advisory
Deloitte & Touche LLP
Ray Gonzalez
Managing director | Risk & Financial Advisory
Deloitte & Touche LLP
Peter Reynolds
Managing director | Risk & Financial Advisory
Deloitte & Touche LLP
Tanya Haddeler
Senior manager | Risk & Financial Advisory
Deloitte & Touche LLP
blue talk box
Did you find this useful?