Country risk management at most banks tends to suffer from one or more of three common defects:
- Country risk and its varieties are not properly defined, making it difficult to understand the nature and size of country risk exposures or to set country risk limits.
- The estimation of country risk is distorted by a misleading method for allocating exposures to countries (i.e. to chalking, as it is commonly known).
- The absence of internally developed, and thus transparent, country risk models makes it difficult to respond adequately to the changing global macro-economic landscape.
- The report discusses these shortcomings and suggest remedies. The report also looks at the components of country risk (DMR, transfer risk and sovereign risk), common transfer risk chalking approaches and measurements of country risk.