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Country Risk Management Guideline for Financial Institutions

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The Monetary Authority of Macao (AMCM) has issued a guideline for country risk management for financial institutions operating in Macao. The following is a summary of the key points:

Systemic Approach to Country Risk Management

  • Comprehensive System: Institutions should develop and implement a comprehensive country risk management system that includes country risk assessment, limit setting, and monitoring.
  • Senior Management Oversight: Senior management should be responsible for ensuring that country risk is properly managed and monitored within their institution.
  • Internal Controls and Audit: Institutions should have adequate internal controls and audit mechanisms in place to ensure that country risk information is accurate and reliable.

Stress Testing for Country Risk

  • Regular Stress Testing: Institutions should regularly stress test their foreign exposures (e.g., monthly or quarterly) to evaluate the impact of different scenarios on their country risk.
  • Ad-hoc Stress Testing: In cases where economic or political conditions in a country rapidly deteriorate, institutions may need to conduct ad-hoc or more frequent stress testing.

Country Risk Provisioning

  • Provisioning Approaches: Institutions can adopt two common approaches for country risk provisioning:
    • Earmarking provisions against aggregate exposures on a country basis.
    • Factoring in an element of provision into specific provisioning for each individual exposure.
  • Adequate Provisions: Institutions should set aside adequate country risk provisions according to their assessment of the probability of losses arising from cross-border exposures.

Supervisory Review

  • Evaluation of Country Risk Management System: The AMCM will evaluate the adequacy of an institution’s system to manage country risk and maintain provisions for such risk.
  • Review of Country Risk Provisions: The AMCM may require institutions to re-assess their country risk provisions if there are grounds to doubt whether their existing provisioning level is adequate.

Overall, this guideline emphasizes the importance of effective country risk management and provisioning for financial institutions operating in Macao, with a focus on ensuring that they have adequate systems and controls in place to manage and monitor country risk.