It is important to formulate and implement a structured credit policy and related processes to manage credit risk. Strategies for credit risk management, including credit policy development and risk monitoring, is the responsibility of business unit and senior management, and the board of directors.

Financial institutions should establish credit limits to control the risk in all credit-related activity. Limits by industry sector, geographical region, product, customer, and country should be specified, along with the approaches to be used for calculating exposures against those limits, and made part of credit policy. Consideration should also be given to the spread across industries or regions as the default of one firm or industry may also affect others. Larger financial institutions might also consider multiple limits for each borrower or borrower group, by product, operational unit, and borrower member so that banking and trading activities of those borrowers or borrower groups creating credit risk can be more adequately monitored. While the trend has been that many financial institutions monitor total exposures in those categories, most have not set maximum limits on those exposures.

Credit risk in the commercial portfolio can be managed based on the risk profile of the borrower, repayment source, and the nature of underlying collateral given current events and conditions. Commercial credit risk management should begin with an assessment of the credit risk profile of an individual borrower or counterparty based on current analysis of the borrower’s financial position in conjunction