US Office of the Comptroller of the Currency Issues Guidance with Respect to Implied Sovereign Support

The U.S. Office of the Comptroller of the Currency issued guidance to OCC-supervised institutions with respect to the role of informal or implied expressions of support from foreign governments in determining credit risk ratings.  The OCC guidance builds upon Appendix E of the Rating Credit Risk booklet of the Comptroller’s Handbook, which discusses informal or implied sovereign guarantees, and provides a list of factors for examiners to consider when evaluating this type of support.  The guidance notes a number of factors that should be considered when evaluating informal or implied sovereign guarantees, including the strength of the sovereign; whether any liquidity or legal constraints exist that may affect the availability of support by the sovereign; and the likelihood of a counterparty receiving support from a sovereign. With respect to the latter, the OCC notes that evaluation of this factor includes analysis regarding any legal and financial obligations of the sovereign, the ownership or control of the counterparty and the sovereign’s willingness to support the counterparty.  The guidance notes that analysis of informal or implied sovereign guarantees should reference and consider any precedent examples where the sovereign provided support to the counterparty, the effect that any support could have on the sovereign’s own creditworthiness and how other factors (e.g., political or economic changes or new legislation) may affect the sovereign’s willingness to support the counterparty.  The guidance provides that while informal or implied sovereign guarantees may result in changes to a counterparty’s regulatory risk rating, the analysis and determination should be predicated on policies and procedures that provide appropriately documented criteria and methods to determine how and under what circumstances informal or implied sovereign guarantees may affect risk ratings.

View full text of the OCC guidance.