<\/p>\n
Basel Committee issues new guidance on counterparty credit risk weaknesses.<\/p>\n
Global banking regulators issued new guidance that aims to address a long-standing industry vulnerability \u2014 counterparty credit risk management.<\/p>\n
The Basel Committee on Banking Supervision published new final guidance that replaces standards that were first issued in 1999, largely in response to the collapse of the hedge fund Long-Term Capital Management. It sets out practices that are designed to deal with weaknesses revealed in the global financial crisis, and in other episodes of market stress.<\/p>\n
\u201cIn recent years, there have been additional cases of significant mismanagement of counterparty credit risk, including events linked to the failure of Archegos Capital Management in March 2021, which caused over US$10 billion in losses across numerous financial institutions,\u201d the Basel Committee noted in the paper setting out its new guidance.<\/p>\n
There have been other high-profile incidents since then too, including extreme volatility in the commodities market that accompanied Russia\u2019s invasion of Ukraine in 2022, and the disruption of the U.K.\u2019s gilt market in late 2022 and early 2023, which cascaded over to the banking sector.<\/p>\n
\u201cThese incidents have made it clear that certain fundamental counterparty credit risk practices remain inadequate relative to supervisory expectations,\u201d the group said.<\/p>\n
For instance, these episodes have exposed weaknesses in banks\u2019 due diligence, their credit risk mitigation practices (such as margining), risk measurement, stress testing, governance and senior management oversight of these risks.<\/p>\n
In response, the new guidance details standards for carrying out due diligence on banks\u2019 counterparties, both at initial account opening and on an ongoing basis; details practices for measuring and controlling counterparty credit risk, and for developing credit risk mitigation strategies to deal with these exposures; and sets governance expectations.<\/p>\n
While the new guidelines are designed to apply to all types of counterparty credit risk exposures, \u201cthe greatest potential benefits are expected to be in cases where banks have high-risk exposures to counterparties, including non-bank financial institutions,\u201d the Basel Committee said.<\/p>\n
The group called on banking regulators around the world to fully adopt the new guidance with internationally active banks, as soon as possible.<\/p>\n
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