Effective processes and control mechanisms

Institutions should:

• a. Identify their individual exposures to shadow banking entities, all potential risks to the institution arising from those exposures, and the potential impact of those risks.
• b. Set out an internal framework for the identification, management, control and mitigation of the risks outlined in point a). This framework should include clearly defined analyses to be performed by risk officers regarding the business of a shadow banking entity to which an exposure arises, the potential risks to the institution and the likelihood of contagion stemming from these risks to the entity. Those analyses should be performed under the supervision of the credit risk committee, which should be duly informed of the results.
• c. Ensure that risks outlined in letter a) are adequately taken into account within the institution’s Internal Capital Adequacy Assessment (ICAAP) and capital planning.
• d. Based on the assessment conducted under letter a), set the institution’s risk tolerance/risk appetite for exposures to shadow banking entities.
• e. Implement a robust process for determining interconnectedness between shadow banking entities, and between shadow banking entities and the institution. This process should in particular address situations where interconnectedness cannot be determined, and set out appropriate mitigation techniques to address potential risks stemming from this uncertainty.
• f. Have effective procedures and reporting processes to the management body regarding exposures to shadow banking entities within the institution’s overall risk management framework.
• g. Implement appropriate action plans in the event of a breach of the limits set by the institution in accordance with Section 5.