The following are the recommended best practices for Limits & Controls:
Review exposure limits on a regularly scheduled basis: While most financial institutions review the exposure limits on an annual basis, depending upon your financial institution’s Credit Policy or ACH Policy you may want to review them on a more frequent basis. Refer to your financial institution’s internal policies for additional guidance.
Review new clients more frequently: While you are beginning a relationship with a new client it may be advisable to review their exposure limits on a more frequent basis. One respondent indicated that they review new customers at 3 months, 6 months and 1 year, before going to an annual review cycle.
Define criteria for when an additional review is needed: Within the policy structure of your financial institution should be the criteria defining when additional reviews are needed. Among the most frequently mentioned criteria were the following:
- Recent change in the client’s financial condition (as defined by your organization)
- If an Originator has exceeded their current limit a certain number of times over a defined period of time.
If the Originator has a significant change in their business or business practices.
- Establish limits for Internal Originators to reduce Operational and Reputational Risk: This is an often overlooked area within many financial institutions since Credit Risk for the internal department or affiliate company is generally not an issue. However, establishing an exposure limit that is at an appropriate level may help you to stop a file that was incorrectly built and may contain duplicate or incorrect items. Slightly over 1/3 of the survey respondents had no established exposure limits for Internal Originators.