20 18 Risk Management Examination for Intermediate Banks Focus: Chapter VII Country Risk Management
Chapter VII Country Risk Management
7. 1 national risk identification
7. 1. 1 country risk type
The main types of national risks include transfer risk, sovereignty risk, contagion risk, currency risk, macroeconomic risk, political risk and indirect national risk.
1. Transfer risk is one of the main types of country risks, which refers to the risk that the borrower or debtor cannot obtain the required foreign exchange to repay their overseas debts due to insufficient foreign exchange reserves or foreign exchange control.
2. Sovereign risk refers to the possibility that foreign governments are unable or refuse to pay their direct or indirect foreign currency debts;
3. The contagion risk refers to the risk that the unfavorable situation of one country leads to the downgrade or credit crunch of other countries in the region. Even if these countries do not have these unfavorable conditions, their credit status has not deteriorated;
4. Currency risk refers to the risk that the debtor's local currency or cash flow is insufficient to pay his foreign currency debts due to unfavorable exchange rate changes or currency depreciation;
5. Macroeconomic risk refers to the risk that the debtor suffers from interest rate fluctuation because his government takes measures to maintain its currency value;
6. Political risk refers to the risk borne by the debtor due to political conflict, regime change, war or nationalization or expropriation of the debtor's assets in the host country;
7. Indirect country risk refers to the risk that the economic, political or social situation of a country deteriorates, threatening the repayment ability of domestic borrowers with significant commercial relations or interests in that country.
The connection and difference between national risk and sovereign risk
Sovereign risk:
Refers to the possibility that foreign governments are unable or refuse to pay their direct or indirect foreign currency debts;
Sovereign risk is a part of national risk;
Sovereign risk is a category of credit risk, and sovereign risk rating reflects the probability of sovereign government default.
The results of sovereign rating will serve as the basis for credit granting, limit, policy formulation and risk monitoring of sovereign customers;
Country risk:
National risk exceeds credit risk;
Country rating reflects the comprehensive risk degree of a country (region) in politics, economy, finance, finance, balance of payments, system operation and so on;
The national risk level only indicates the ranking, not the default rate;
The country rating results are mainly used as the basis for setting country limits, granting credit to overseas customers, classifying loans and withdrawing country reserves.
Three important differences:
First, country risk has a broader perspective on risk;
Second, the risk factors of country risk consideration are more complicated, and the most basic and important thing is to transfer risks;
Third, once there is a country risk, the business scope affected will be even larger.
7. 1.2 national risk identification
Under normal circumstances, when the following events or indicators change, it is considered that a country risk has occurred:
1. Sovereign default: refers to the default of the sovereign debtor, and refers to any behavior of not paying or delaying the payment of interest and/or principal.
2. Transfer event: refers to the situation that the borrower or debtor cannot obtain the required foreign exchange to repay its overseas debts due to insufficient domestic foreign exchange reserves or foreign exchange control, or the debtor's assets are nationalized or requisitioned;
3. Currency depreciation: refers to the depreciation of the local currency against the US dollar by more than 25% or more within one year, depending on the year background and the regulatory needs of a country;
4. Banking crisis: refers to the collapse of the banking system in an economy, especially in the context of the financial crisis;
5. Political turmoil: political conflict, abnormal regime change, war, etc. Occurred in the debtor's country.
The country where the risk subject is located usually refers to the country where the company is established, except for the following situations:
1. When the entity is not a branch of a bank corporate enterprise, the country where it is located is the place where its head office is registered;
2. When the subject is a bank branch, the country (region) where the direct risk subject is located shall be listed in the country (region) where the branch is located, and the country where the ultimate risk subject is located shall be regarded as the country (region) where its head office is located according to the secured transfer;
3. When the direct risk subject is a shell company or a company with a special purpose carrier, its location is the area where it engages in actual business activities or the location of its management organization;
4. For aircraft and ship financing, if there is a long-term lease and the main source country of repayment can be clearly specified, the source country of repayment should generally be the country where the direct risk subject is located. If there is no long-term lease or the repayment country cannot be specified, the country where the direct risk subject is located is the country where the ultimate owner of the aircraft/ship is located;
5. If the country to which the direct risk subject belongs cannot be clearly defined, such as fund investment, it shall be determined according to the country or region that best represents the assets;
6. If the risk subject is an international organization, the country to which it belongs is uniformly recognized as an "international organization" and does not belong to any specific country.
Risk transfer includes guarantee transfer, insurance transfer and credit derivative transfer.