Document ID: chunk:federal_register_of_legislation:F2022L01576:body:0:p7
Version: federal_register_of_legislation:F2022L01576
Segment Type: other
Provision Reference: 
Character Range: 17386–20663

from the business function. This may involve an ADI's independent risk management and compliance function or an independent internal audit function or qualified external party.

Credit risk policies and processes
30.         An ADI must adopt and implement prudent and well-documented policies and processes to identify, measure, monitor, report and control or mitigate credit risk. The full credit life-cycle must be considered, including credit origination, initial and subsequent credit assessment and approval processes and the ongoing monitoring and management of the ADI's credit exposures and portfolio.
31.         Credit risk policies must address such topics as target markets, portfolio mix, price and non-price terms, the structure of limits, approval authorities and overrides, waivers or exceptions processing and reporting. Such policies must be well-documented, clearly defined, consistent with prudent practices and applicable laws and regulations, and adequate for the size, nature and complexity of the ADI's activities.
32.         Credit risk policies must be designed and implemented within the context of internal and external factors such as the ADI's market position, personnel capabilities and technology. Appropriate operational capacity and business systems must be in place to support the credit risk management strategy before the strategy is implemented.
33.         An ADI must have prudent and well-documented policies and processes for the early identification and management of problem exposures, including non-performing and restructured exposures and other transactions, and the maintenance of adequate provisions.
34.         An ADI must have appropriate credit risk practices, including an effective system of internal control, to consistently determine adequate provisions in accordance with the ADI's stated policies and processes and Australian Accounting Standards.

Internal risk appetite limits
35.         In addition to the requirements in CPS 220, APS 221 and APS 222, an ADI must develop and implement appropriate policies and processes to ensure that the credit portfolio is adequately diversified given the ADI's target markets and credit risk management strategy. In particular, such policies must establish targets for portfolio mix as well as set prudent limits on exposures to:
       (a)          higher risk borrowers;
       (b)          higher risk credit products and activities; and
       (c)          particular industry sectors and geographical locations, where appropriate.

Country and transfer risk
36.         An ADI that originates credit exposures in geographical locations other than Australia must have prudent policies and processes for identifying, evaluating, measuring, monitoring, reporting and controlling or mitigating country risk and transfer risk.  Country or sovereign risk encompasses the entire spectrum of risks arising from the economic, political and social environments of a foreign country that may have potential consequences for foreigners' debt and equity investments in that country. Transfer risk focuses more specifically on a borrower's capacity to obtain the foreign exchange necessary to service its cross-border debt and other contractual obligations. The monitoring of country