Guidance

SS20/15 – Supervising building societies’ treasury and lending activities

Chapter

Appendix 1 – Credit risk management controls

Printed on: 06/11/2024

Rulebook at: 01/01/2021

Appendix 1 – Credit risk management controls

  Traditional Limited Mitigated
Risk management structure If no dedicated risk management function, CEO/CFO will fulfil this role Risk management function (fully independent of lending and sales functions) reporting direct to CEO
 Head of Risk function (senior executive or Director level) supported by risk management team, reporting to credit risk committee (or similar)
Risk appetite
statement

Approved by board at least annually
Reviewed to consider continued applicability at least semi-annually

 Approved by board at least annually
Reviewed to consider continued applicability at least semi-annually
 Approved by board or Risk Committee (or similar) at least annually
Reviewed to consider continued applicability at least quarterly
Lending policy statement Approved by board and reviewed at least annually
Limit structure
 Lending limits covering both stocks and flows of different types of lending business
Risk Pricing Basic risk pricing methodology, incorporating bureau data, the outcome of internal stress testing and the board’s required return on capital
 Broad risk pricing methodology incorporating behavioural analysis, risk grading, and minimum return on capital requirements
 Comprehensive risk pricing methodology, with PD, EAD and LGD modelling to calculate EL and a board approved hurdle rate of return on risk-adjusted capital
Large loan
exposure
restrictions
 Lending policy restricts loan exposure to connected counterparties to <= 10% of capital resources
 Lending policy restricts loan exposure to connected counterparties to <= 15% of capital resources
 Lending policy sets limits on exposures to connected counterparties within statutory or regulatory limits
Underwriting

Cases fully underwritten on an individual basis

Limited delegation under mandates

Board to approve all loans where aggregate exposure to borrower and/or connected clients => 2.5% of capital resources

Appropriate underwriting expertise for all lending (including specialists for any non-standard lending – eg Buy-to-let and Self-build).

Fraud checks against external databases.

Independent underwriting function

Cases underwritten individually or systematically credit scored

Hierarchy of fully delegated mandates (with exception reporting to senior management)

Appropriate specialist underwriting expertise for all categories of lending undertaken (eg Buy-to-let, Self-build)

May use specialist anti-fraud systems

Independent underwriting function

Cases systematically credit scored (with manual over-ride where appropriate)

Hierarchy of fully delegated mandates

Appropriate specialist underwriting teams for all categories of lending undertaken

Use specialist anti-fraud systems

PD/EAD/LGD modelling
Risk mitigation

Risks mitigated by combination of:

  • underwriting criteria
  • risk pricing
  • conservative LTV or external insurance on higher LTV exposures
  • other collateral

Risks mitigated by combination of:

  • underwriting criteria
  • risk pricing
  • conservative LTV or external insurance (including stop-loss/excess of loss insurance)
  • other collateral

Risks mitigated by combination of:

  • underwriting criteria
  • risk pricing
  • conservative LTV or external insurance (including stop-loss/excess of loss insurance at pool or portfolio level)
  • other collateral
  • credit default swaps
  • loan book sales
Valuations

Undertaken by independent internal / external valuer

AVMs within parameters recorded in policy statement

Undertaken by independent internal / external valuer

AVMs within parameters recorded in policy statement

Undertaken by independent internal / external valuer

AVMs within parameters recorded in policy statement
Segregation of duty between:
Underwriting
function and
mortgage sales
function (providing
‘four-eyes’
check over lending)
 Segregation at executive manager level
 Segregation at an operational level
 Full segregation

Underwriting
function and
the lending review/audit
/compliance functions
which check
(1) compliance with underwriting and fraud policy and legislation; and
(2) lending/ underwriting quality (by review of MI, live fraud cases, bad debt cases, etc.).

 Segregation at executive manager level
 Segregation at an operational level
 Full segregation
Stress testing
 Simple stress testing (changes in security values based on appropriate HPI movements) undertaken on annual basis, or more frequently if market conditions warrant  Stress testing and scenario analysis (at level of individual asset pools) on semi-annual basis
 Econometric analysis and full stress testing/scenario analysis on at least quarterly basis
In this table:
AVMs = automated valuation models
HPI = house price index
LTV = loan to value
Other recognised collateral = charge over acceptable assets, 3rd party guarantees, etc.
  • 01/01/2021