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To ensure the independence of the process, and achieve a holistic approach to credit risk monitoring, and prevent conflicts of interest, the unit responsible for managing EWS should operate outside of the loan originating unit. Best practice indicates that the responsibilities to manage the EWS process should be assigned within the credit risk management department and fully incorporated into the bank's regular risk management processes.
Since an effective EWS requires an operational IT system that draws all information available about a particular borrower, EWS benefit from being part of the bank's internal credit rating system that already contains information about the borrower, the bank should allocate enough staff and financial resources to keep the system operational and effective.
The operation of the EWS should be governed by written policies and procedures, including time thresholds for required actions, approved by the Board of Directors of the bank. They should be subject to annual review and reapproved by the Senior Management Committee to incorporate:
i.
Required changes identified during previous operational periods;
ii.
Regulatory amendments; and
iii.
Additionally, independent quality assurance (e.g., review of the process by an external expert or the Internal Audit function) should be considered.
Reporting:
All actions during the EWS process should be recorded in the IT system to provide a written record of decisions and actions taken. At a minimum, the system should record:
i.
Time the action was taken;
ii.
Name and department of those participating/approving the actions;
iii.
The reasons for actions taken; and
iv.
The decision of the appropriate approval authority, if applicable.
The watch list should include, at a minimum, the following information:
i.
Details of the loan;
ii.
Is it part of a group or related party;
iii.
Material or non-material loan;
iv.
Date added to the list;
v.
Reviews taken (including timestamps) and outcomes,
vi.
Mitigation measures; and
vii.
Reasons for inclusion in the watch list.
The watch list (or at least material loans on it) should be presented monthly to a designated management committee (Executive Committee or Risk Committee) only or in parallel with the credit committee for information purposes and potential action. For major cases, the bank's Management Board must be included in the decision-making process. The Board should also receive monthly:
a)
A detailed list of material loans for information: and
b)
Aggregate figures for the loans on the watch list. Information about the borrower/group in potential payment difficulties must be disseminated widely and promptly within the banking group, including branches and subsidiaries. (For details on samples of EWS refer to Appendix 1).
Book traversal links for 2.4 EWS Structure and Institutional Arrangements