Circular No. 11096
October 6, 1998

Sound Credit Risk Management and the Use of
Internal Credit Risk Ratings at Large Banking Organizations

To the Chief Executive Officers of State Member Banks, Bank Holding Companies,
Edge and Agreement Corporations, State-Licensed Branches and Agencies of
Foreign Banks, and Others Concerned, in the Second Federal Reserve District:

As part of its ongoing supervision and examination programs and its longstanding emphasis on sound credit risk management processes, the Federal Reserve reviews internal credit risk management reports and supporting documents. Based largely on these reviews, Federal Reserve staff has identified broad practices in the use of internal credit risk ratings that support strong credit risk management systems at large banking organizations.

To assist supervisors and examiners in their evaluations of the quality of credit risk management processes within banking organizations, the Federal Reserve has developed additional guidance that reflects the benefit of its supervisory efforts to date in this area. The Supervisory Letter outlines the Federal Reserve’s new guidance, and sound practices in the use of such internal rating systems at large institutions, as well as what appear to be emerging sound practices in how these grades are integrated into other key elements of the risk management processes at these organizations. This guidance is in keeping with the risk-focused framework for the supervision of large complex banking organizations, but is being distributed as well to other organizations for their information.

Any questions you may have on this guidance should be directed, at this Bank, to a member of the portfolio management team responsible for your organization.

Chester B. Feldberg,
Executive Vice President