The Basel Committee on Banking Supervision (BCBS) has released guidelines aimed at addressing longstanding weaknesses in counterparty credit risk management within the banking industry. These guidelines emphasize several key practices essential for effective risk mitigation.
Among the recommended practices is the necessity for banks to conduct thorough due diligence of counterparties during both initial onboarding and ongoing assessments. This process aims to ensure that banks fully understand the risks involved before making critical credit decisions and can respond swiftly to changes in counterparties' risk profiles, especially during periods of financial stress.
Additionally, the BCBS suggests developing a comprehensive credit risk mitigation strategy. This includes employing robust contractual terms and utilizing tools such as risk-sensitive margining to manage counterparty exposures effectively.
To measure, control, and limit counterparty credit risk, the guidelines recommend using a diverse array of complementary metrics. These metrics should provide comprehensive coverage of the bank's material risks, portfolios, and counterparties.
The guidelines also advocate for establishing a strong governance framework for counterparty credit risk. Such a framework should include clear risk management processes, defined limits and escalation procedures, and be supported by reliable reporting integrated into decision-making processes.
The Basel Committee encourages banks and supervisors to use these guidelines to identify potential areas for improvement in their counterparty credit risk management practices. The most significant improvements are expected where banks have high-risk exposures to non-bank financial intermediary counterparties (NBFIs).
For further information on how Moody’s Banking Solutions can assist banks in making confident credit decisions, managing loan portfolios effectively, and complying with risk and reporting requirements, please visit their website.
Related Links:
- Press Release
- Proposed Guidelines (PDF)
