Banks Must Comply with NBE Limits on Large Exposures

The National Bank of Ethiopia (NBE) has emphasized the importance of banks establishing provisions for identified and expected losses in line with its directives on provisions and holding adequate capital to absorb unexpected losses.

Compliance with NBE Directives

According to a recent circular from the NBE’s Banking Supervision Directorate, banks must consider potential credits while recognizing the necessity of establishing provisions for identified and expected losses. This includes factoring in credit-granting decisions as well as the overall portfolio risk management process.

Credit Risk Mitigation

Banks can use various techniques to mitigate credit risk, including:

• Collateral and guarantees
• Ensuring that collateral is enforceable and realizable
• Not making assumptions about implied support from third parties, including government entities

Additionally, banks engaged in interbank transactions must have sound and legally enforceable netting agreements in place to reduce credit risks.

Effective Credit Administration

The NBE has emphasized the importance of effective credit administration, including:

• Developing comprehensive procedures and information systems for monitoring the condition of individual counterparties across various portfolios
• Identifying potential problem credits and classifying them properly
• Developing internal risk rating systems to differentiate the degree of credit risk in different credit exposures

Stress Testing

The NBE has encouraged banks to conduct stress testing exercises to discuss potential risks and consider this information in the analysis of capital and provisions. This exercise can reveal previously undetected areas of potential credit risk exposure and help banks understand linkages between different categories of risk that may emerge in times of crisis.

Conclusion

In conclusion, the NBE’s circular emphasizes the importance of effective credit risk management for Ethiopian banks. By establishing provisions for identified and expected losses, mitigating credit risks through collateral and guarantees, developing comprehensive procedures for monitoring credit quality, and conducting stress testing exercises, banks can ensure compliance with NBE limits on large exposures and maintain a stable financial system.