For immediate release

The Federal Reserve today issued a supervisory letter which emphasizes the importance of developing and implementing effective internal credit rating systems and stresses the important role such systems should play in credit risk management, especially at large banking organizations. The letter instructs examiners to evaluate the adequacy of such systems as an element of the normal supervisory process, and tells examiners to consider the results of that evaluation in assessing an institution's risk management, capital adequacy, and asset quality. To assist examiners in their evaluation, the letter describes sound practices in the design of risk rating systems and in the internal processes by which banks assign and validate risk ratings. The letter also addresses current and emerging practices in application of risk ratings to several key areas of large banks' overall risk management processes. Internal credit risk ratings are used by large banking institutions to identify gradations in credit risk among their business loans. The supervisory letter grows out of a Federal Reserve staff analysis of internal credit risk rating systems and exposures at large institutions. The long-term goal of this analysis is to encourage broader adoption of sound practices in the use of such ratings and to promote further innovation and enhancements by the industry in this area. The supervisory letter is attached.

1998 Banking and consumer regulatory policy