1. 1.The risk governance framework varies with the specific circumstances of each bank, particularly the risk profile, nature, size and complexity of its business and structure. For a bank with material country and transfer risk exposures, its risk governance framework must address the following:
   1. a.Effective oversight by the board of directors;
   2. b.Adequate risk management policies and procedures;
   3. c.An accurate system for reporting country exposures;
   4. d.An effective process for analyzing country risk;
   5. e.A country risk-rating system;
   6. f.Country risk exposure limits;
   7. g.Regular monitoring of country conditions;
   8. h.Provisioning policies that explicitly consider country and transfer risks;
   9. i.Periodic stress-testing of foreign exposures;
   10. j.Oversight by the risk management function; and
   11. k.Independent assurance by the internal audit function.
2. 2.A bank’s definition and identification of material country and transfer risks must take into account the risk profile, nature, size and complexity of its business and structure. The Central Bank will generally consider as material an aggregate exposure to any single foreign jurisdiction exceeding five percent, or an aggregate exposure to all foreign jurisdictions exceeding 10 percent, of any relevant metric which may include but is not limited to total loans, total liabilities, interest income, interest expense and non-interest income. Banks are encouraged to establish lower thresholds for materiality if required for consistency with the board-approved risk appetite statement.
3. 3.A bank must establish and maintain a board-approved risk appetite statement that specifies the types of country risk the bank is prepared to assume in pursuit of its business strategy and objectives and limits for those risks. For banks with moderate country risk exposure it may be appropriate to address these risks under a single grouping of cross-border exposures, but depending on the business of the bank, it may be appropriate to specifically address some or all of the below:
   1. a.Sovereign risk — a foreign government’s capacity and willingness to repay its direct and indirect foreign currency obligations;
   2. b.Contagion risk — adverse developments in one country lead to a downgrade and/or difficulty accessing international markets not only for that country but for others in a region or investment class, notwithstanding that the other countries may be more credit worthy;
   3. c.Currency risk — a borrower’s domestic currency holdings and cash flow become inadequate to service its foreign currency denominated debt due to changes in exchange rates²;
   4. d.Indirect country risk — the repayment ability of a domestic borrower is affected by adverse developments in a country where the borrower has significant business interests;
   5. e.Liquidity risk — developments in a country where the bank raises a significant portion of its deposits or other funding may adversely affect the bank’s liquidity and funding profile; and
   6. f.Macroeconomic risks — a foreign counterparty may be adversely affected by high interest rates, currency depreciation or broader macroeconomic instability, affecting its repayment capacity.
4. 4.The board-approved risk appetite statement must specify authorized activities, investments and instruments and delineate any types of country and transfer risk that the bank is not prepared to assume and, where appropriate, specify any activities, investments and instruments that are not consistent with the bank’s risk appetite. Risk limits are typically established on a country basis, but banks must also consider whether regional or other limits such as aggregate exposures to lesser developed countries are appropriate.
5. 5.A bank must also consider whether different limits may be established for different types of exposure in a specific country.
6. 6.Country exposure limits, sub-limits and regional or other limits with respect to country and transfer risk as established in the board-approved risk appetite statement must take into account the following:
   1. a.The bank’s overall strategy guiding its international activities;
   2. b.Country risk ratings and the bank’s risk tolerance;
   3. c.Perceived business opportunities in the country (or region); and
   4. d.Support for the international business needs of domestic customers.
7. 7.A bank’s provisioning policies must expressly consider country and transfer risks. Provisions for country and transfer risks may be made on an aggregate basis by country in addition to specific provisions against individual exposures, or by factoring an element of provision for each country risk into the specific provisioning for each individual exposure. Regardless of the approach, banks must ensure adequate provisioning for country and transfer risks based on their assessment of the probability of losses on their cross-border exposures.

² Note that this is in addition to transfer risk — the risk that official restrictions on currency conversion and/or cross-border remittances may affect the counterparty’s ability to make payments.