BCBS Updated Principles for the Management of Credit Risk - Implications for the Risk Management Team and the Executive Board
Kishore Kumar R.
Capital Markets Advisory | Steering Regulatory Change for Future-Ready Financial Institutions | Qualified Independent Director | Thought Leader
The 2025 update to the Principles for the Management of Credit Risk reinforces the Basel Committee’s commitment to robust credit risk management in banks. The updated 2025 Credit Risk Principles from the Basel Committee represent a shift from more prescriptive guidelines to principle-based regulation, which has implications for complexity management in banking regulation.
While the 2025 Credit Risk Principles are primarily a technical update that aligns terminology with the current Basel Framework, they maintain the same four-pillar structure as before. However, by referencing newer Basel guidance on emerging risks (climate risk, counterparty credit risk, etc.), they indirectly increase the scope and potential complexity of credit risk management for banks. There are no changes to RWA calculations, ECL methodologies, credit risk modelling approaches, capital requirement formulas or risk measurement techniques.
The 2025 update focuses on 4 principal areas of credit risk management
Establishing an Appropriate Credit Risk Environment: The board of directors is responsible for approving and regularly reviewing the bank’s credit risk strategy and significant credit risk policies. The strategy should reflect the bank’s risk appetite, target returns, and consider market and macroeconomic conditions. It must be communicated throughout the organization, and remuneration policies should not incentivize excessive risk-taking.
Operating Under a Sound Credit-Granting Process: Senior management is tasked with implementing the board-approved credit risk strategy, ensuring robust policies and procedures are in place for identifying, measuring, and managing credit risk. This includes setting exposure limits, ensuring portfolio diversification, and addressing both individual and portfolio-level risks. Special attention is required for international lending, where country and transfer risks must be managed.
Maintaining an Appropriate Credit Administration, Measurement, and Monitoring Process: Banks must have systems to administer credits, measure exposures, and monitor credit risk on an ongoing basis to ensure timely identification and management of problem assets. This includes regular independent internal assessments and compliance with both internal and external regulatory requirements.
Ensuring Adequate Controls Over Credit Risk: The principles emphasize the need for strong internal controls, independent reviews, and clear accountability in the credit risk management process. The board must ensure that credit-granting decisions are not overridden due to conflicts of interest, and that all processes are regularly reviewed for effectiveness.
Impact of the updated credit risk principles on the Bank's overall strategy
The updated Credit Risk Principles drive banks to embed credit risk management at the heart of their overall strategy-ensuring alignment with risk appetite, regulatory expectations, and long-term sustainability. While the 2025 update is primarily technical, it reinforces the need for strategic discipline, board-level engagement, and forward-looking, comprehensive risk management. It is recommended that banks review their strategic planning processes to ensure full alignment with these reinforced expectations
Reinforcing Strategic Alignment with Risk Appetite
Board-level Responsibility: The updated principles reiterate that the board of directors must approve and annually review the bank’s credit risk strategy. This ensures that credit risk is not managed in isolation but is a core component of the bank’s overall business strategy.
Risk/Return Balance: The strategy must reflect the bank’s risk tolerance and sustainable return objectives, considering market and macroeconomic conditions. This pushes banks to align their growth ambitions with prudent risk-taking, rather than chasing short-term profits.
Governance and Accountability
Clear Roles: The principles clarify the distinction between board oversight and senior management execution, ensuring clear lines of accountability for credit risk decisions.
Remuneration Policies: Banks are encouraged to align compensation structures with long-term credit quality, discouraging excessive risk-taking for short-term gains.
Comprehensive and Forward-Looking Risk Management
Holistic Approach: Banks must address credit risk in all activities-lending, investments, trading, and off-balance sheet exposures-embedding risk management throughout the organization.
Forward-Looking Strategy: The principles emphasize considering cyclical economic factors and forward-looking information, prompting banks to develop strategies that are resilient across economic cycles.
Integration with Latest Regulatory Standards
Alignment with Basel Guidance: The update ensures banks’ strategies are consistent with the latest Basel documents (e.g., on expected credit losses, climate-related risks, counterparty risk). This encourages banks to integrate emerging risks and regulatory expectations into their strategic planning.
Updated Terminology and References: Banks are prompted to review and update their internal strategies and documentation to reflect current regulatory language and best practices.
Portfolio Diversification and Concentration Management
Strategic Portfolio Mix: The principles require banks to set targets for portfolio diversification (by sector, geography, product, etc.) and establish exposure limits, ensuring that concentration risk is managed as a strategic priority.
Innovation and New Products
Risk Assessment for New Activities: Before launching new products or entering new markets, banks must ensure that adequate risk management procedures and controls are in place and approved at the board level. This fosters a culture of prudent innovation.
Supervisory Scrutiny
Annual Strategy Review: Supervisors will expect evidence that the board and management are actively reviewing and updating the credit risk strategy. This raises the bar for strategic discipline and documentation
Recommended Actionable Steps for the Risk Management Teams and the Executive Board in light of the updated Credit Risk Principles
Board and Senior Management Oversight
Confirm the board formally approves and annually reviews the bank’s credit risk strategy and significant credit risk policies.
Ensure the credit risk strategy reflects the bank’s risk appetite, target returns, and current market/macro conditions.
Verify that senior management implements the board-approved strategy and policies, and regularly reports to the board on credit risk exposures and trends.
Check that remuneration policies are aligned with prudent credit risk management and do not incentivize excessive risk-taking.
Credit Risk Environment
Assess whether the bank’s credit risk culture and risk awareness are embedded across all business lines.
Confirm that risk identification covers all products and activities, including new and innovative offerings, before launch.
Ensure that emerging risks (e.g., climate-related, counterparty credit risk) are considered in strategic planning and risk assessments.
Credit Granting and Administration
Review credit-granting criteria to ensure they are well-defined, documented, and consistently applied.
Confirm that credit approval processes are robust, with clear authority levels and independent review where appropriate.
Ensure credit limits are set for individual and group exposures, and that concentration risks are managed strategically.
Check that credit administration, measurement, and monitoring systems are up to date, comprehensive, and aligned with Basel expectations.
Risk Measurement and Monitoring
Verify that risk measurement systems are capable of identifying, measuring, aggregating, and reporting credit risk exposures at both individual and portfolio levels.
Ensure regular, comprehensive risk reporting to senior management and the board, including stress testing and scenario analysis for material risks.
Confirm that risk data aggregation and reporting practices meet BCBS 239 standards for accuracy, comprehensiveness, clarity, and timeliness.
Controls and Independent Review
Assess the adequacy of internal controls over credit risk, including segregation of duties and independent review of credit decisions.
Ensure internal audit or independent risk functions regularly review credit risk management processes and report findings to the board.
Confirm that any identified weaknesses or breaches are promptly remediated and that lessons learned are incorporated into future strategy.
Supervisory and Regulatory Alignment
Review all policies and procedures to ensure alignment with the latest Basel Framework and referenced guidance (e.g., ECL, climate risk, counterparty risk).
Prepare for supervisory reviews by maintaining up-to-date documentation and evidence of board/management oversight and strategic alignment.
Change Management and Training
Develop and deliver training programs for board members, senior management, and relevant staff on updated principles and their implications.
Establish a change management plan to address policy, process, and system updates required by the revised principles.
Key Questions for the Board
When was the last formal review and approval of our credit risk strategy and policies?
How does our strategy reflect current risk appetite, market conditions, and emerging risks (e.g., climate, counterparty)?
Are our credit-granting standards and approval processes robust, consistent, and independently reviewed?
Do we have adequate systems for measuring, monitoring, and reporting credit risk across all activities?
How do we ensure our remuneration policy supports prudent risk-taking?
Are our risk data aggregation and reporting practices compliant with BCBS 239?
What is our process for identifying and responding to weaknesses or breaches in credit risk management?
How are we preparing for supervisory reviews under the updated Basel principles?
Whilst the 2025 update to the Credit Risk Principles does not directly change capital requirements, but it strengthens the link between sound credit risk management and supervisory expectations. Banks with robust, up-to-date credit risk frameworks will be better positioned to meet both current and future regulatory capital standards, while those with weaknesses may face higher capital add-ons through supervisory review.