The onus is on bankers to do a better job assessing credit risk or face the consequences, as the Federal Reserve Board followed the lead of other regulators last week by issuing guidance asking banks to tighten their lending standards to hedge funds. Risk management experts are split on how tricky that will prove to be.

"The challenge to banks is to have enough information to accurately assess risk. It’s putting the burden on the banks to come up with ways to adequately assess risk on companies before they lend to them," said Cynthia Glassman, director of commercial bank risk management at Ernst & Young.

"Hedge funds’s strategy are proprietary and their positions are their business the bottom line is it’s a credit risk issue, and if you’re going to lend to these companies you need to understand the risk, but understanding the risk on these companies is harder."

Leslie Rahl, principal in Capital Markets Risk Advisors, found the guidance like "the flag and apple pie." She explained, "It’s good common sense, but there’s nothing really people shouldn’t already be doing."

Rahl said the only thing the letter did not seem to address is the need not only to update data for changes in exchange rates and interest rates, but updating the potential for future exposure based on more subtle variables like volatility and correlation.

The move is destined to encourage banks to self-regulate, said a former regulator. But further regulation could be proposed eventually if the Fed find that banks are not responsive to the guidance, said Donald T. Vangel, a former senior vice president in bank supervision at the Federal Reserve Bank of New York.

The Fed’s Supervision and Regulation (SR) letter comes on the heels of similar statements made last week by the Office of the Comptroller of the Currency and also by the Switzerland-based Bank for International Settlements Committee on Banking Supervision.

The Fed recommended that banks have internal audit and independent risk management functions. The letter accompanying the guidance also said banks need to enhance their measurement of counterparty credit risk exposures, including the establishment of stress testing methodologies "that better incorporate the interaction of market and credit risk."

The moves by the Fed, OCC and Basle Committee follow the near-collapse of Connecticut-based hedge fund Long-Term Capital Management in September. The fund was rescued by a group of 14 financial companies, in a move coordinated by the Federal Reserve Bank of New York.