Guidance regarding the role of informal or implied expressions of support from foreign governments in determining a borrower’s obligor and facility credit risk ratings was issued for banks and thrifts by the Office of the Comptroller of the Currency (OCC) Tuesday.
In a release, the OCC said because the “implied sovereign support” is not a legally binding guarantee, the guidance it issued in a bulletin “reminds banks that such expressions of informal or implied support should be viewed as no more than a mitigating factor when evaluating a borrower’s credit risk.”
According to the agency, the bulletin provides guidance on obligor and facility credit risk ratings that incorporate implied sovereign support as a mitigating factor, and the adequacy of bank policies to guide the recognition and application of implied sovereign support.
The OCC noted that the “Rating Credit Risk” booklet of its Comptroller’s Handbook explains that informal or implied guarantees from foreign governments (or “sovereigns”) may mitigate credit risk. “Examiners have observed that some banks, especially those with meaningful foreign credit exposures, might consider implied sovereign support in their determination of obligor and facility credit risk ratings,” the agency said.
“Implied sovereign support reflects an expectation that an obligor will receive financial assistance from a foreign government if the obligor is unable to meet its financial obligations,” the OCC said. “Implied sovereign support is not legally binding, so banks should not rely exclusively on this informal commitment when evaluating credit risk and assigning risk ratings. Appendix E of the ‘Rating Credit Risk’ booklet lists a number of factors to consider when assessing implied support.