The International Association of Credit Portfolio Managers today issued Sound Practices in Credit Portfolio Management, a list of practices and principles designed for use by senior executives responsible for their firm’s credit risk management. The document creates a set of benchmarks against which portfolio managers can compare their own practices. It also gives them an industry developed, high level and easy-to-understand set of guidelines they can use within their firms or externally with regulators to help explain their analyses and conclusions.
“This set of Sound Practices represents a comprehensive effort by our members, who recognized the value of identifying the broad attributes of a successful credit portfolio management program in order to provide guidance to their firms and to the industry,” said Som-lok Leung, executive director of IACPM.
In large measure, the need to develop a set of sound practices has come about because the role and practice of credit portfolio management has changed substantially over the past ten years. Banks and insurance companies, among others, have become more aware of their need to manage the risk profiles of their loan and long-term bond portfolios. Additionally, sophisticated measuring tools have been developed which allow portfolio managers to more closely assess risk and make recommendations for better balancing risk and return. Finally, the strong increase in liquidity in the credit market, as well as the explosive growth of such products as credit default swaps has necessitated the need to develop strong credit portfolio management practices.
“The Sound Practices are really an attempt by the industry to set down an outline of what people can expect from a portfolio management program, as well as identifying some of the key elements of a successful portfolio management effort,” said Jim Lentino, Managing Director at ABN-AMRO and chair of the IACPM’s Sound Practices Drafting Committee.
The guidelines were developed over the past year by a working group of 22 IACPM members. Rather than create a prescriptive list of rules, the group designed the practices to serve as a framework which firms can use to benchmark their activities and to measure the development of their portfolio management efforts. The 30 sound practices cover almost a dozen broad themes, including identifying the role of a credit portfolio manager, setting limits and managing concentrations and rebalancing a portfolio to achieve strategic objectives.
“The sound practices are intended to be a guideline. Most firms have developed their own procedures and the sound practices can be used as a standard against which portfolio managers can compare their own programs,” said Bill Ingrassia of JPMorgan Chase.
The Sound Practices also help define credit portfolio management and examine the relationship between this type of risk management and related activities within an institution. While there has not previously been an industry-wide common definition for the term, the Sound Practices suggest a credit portfolio is generally comprised of credit positions such as loans, bonds, collateralized debt obligations and other products which comprise a portfolio of correlated assets. The portfolios are held not only by banks but also by institutions such as insurance companies, asset managers and hedge funds. Portfolio management is the process of measuring and monitoring the exposures and risks in a portfolio and taking action to construct the portfolio that would best meet a firm’s objectives.
The Sound Practices in Credit Portfolio Management document is available on the Association’s website, www.iacpm.org.
The IACPM, with 59 member institutions located in ten countries, is a professional association dedicated to the advancement of credit portfolio management.