Dr. Md. Touhidul Alam Khan :
In the dynamic realm of global finance, characterized by economic uncertainty and increasingly complex financial instruments, the Principles for the Management of Credit Risk established by the Basel Committee on Banking Supervision (BCBS) serve as a fundamental framework.
Updated in April 2025, these principles not only reaffirm the essential tenets of prudent banking but also adapt to contemporary challenges, including climate-related risks and the complexities of counterparty exposures.
Governance: The foundation of effective risk management
At the heart of the BCBS framework lies the imperative for a bank’s board of directors to take ownership of the credit risk strategy. This responsibility is not merely symbolic; it requires active engagement and ongoing oversight.
The board must ensure that policies align with the bank’s risk appetite, consider macroeconomic fluctuations, and remain resilient throughout economic cycles. Importantly, the principles caution against the dangers of short-termism, explicitly condemning remuneration practices that promote imprudent lending behavior.
Senior management plays a pivotal role in translating this strategy into actionable practices. The updated guidelines highlight the necessity of robust internal controls, independent credit assessments, and clear accountability mechanisms.
In an age where fintech innovations and intricate derivatives can blur traditional risk boundaries, these principles serve as a critical reminder that the foundational elements of credit risk management remain consistent.
The credit lifecycle: From origination to resolution
Effective credit granting transcends the simplistic binary of approving or denying loans; it involves a deep understanding of the borrower, the purpose of the credit, and the structural safeguards in place. The BCBS principles emphasize the importance of thoroughly knowing counterparty dynamics, avoiding excessive reliance on collateral, and resisting the inclination to lend solely based on reputation.
Once credit is granted, vigilance must continue unabated. Continuous monitoring, early identification of deteriorating exposures, and proactive management of potential issues are essential. The guidelines highlight the risks associated with complacency, urging banks to act before defaults occur. Proactive methods, such as stress testing and scenario analysis, should be employed to anticipate and address vulnerabilities.
The supervisory imperative
Regulators also play a critical role in this framework. The principles emphasize that supervisory bodies must move beyond mere compliance checks. Their mandate includes evaluating the effectiveness of banks’ risk management practices, including the assessment of internal risk rating systems and the validation of stress test methodologies, ensuring that problematic assets are swiftly identified and remedied.
In an interconnected financial landscape, where risks can propagate across borders, the BCBS framework advocates for a holistic view of credit risk. A bank’s exposures, whether on-balance sheet, off-balance sheet, or embedded in complex derivatives, must be transparent, quantifiable, and actively managed.
A call to discipline
The 2025 update does not aim to overhaul existing practices but instead reinforces the enduring principle that effective credit risk management involves not merely avoiding risk but understanding, pricing, and mitigating it judiciously.
Banks that regard these principles as mere regulatory formalities do so at their own peril; conversely, those that adopt them as a strategic guide are more likely to not only endure turbulent times but also thrive during them.
In a landscape where financial crises often stem from lax credit standards, the Basel principles stand as banking’s strongest defense. They represent not just regulatory requirements but the distilled wisdom gleaned from decades of experience—a blueprint for building resilience in an unpredictable world.
The April 2025 update to the Principles for the Management of Credit Risk reflects the Basel Committee’s unwavering commitment to fostering financial stability. For both bankers and regulators, it serves as a clarion call to maintain discipline, foresight, and accountability now and in the years ahead.
(The author is Managing Director & CEO of NRBC Bank PLC and fellow cost & management accountant from ICMAB.)
