Banks Are Not Ready for Counterparty Risk Elements of Basel lll
Enhancing Counterparty Credit Risk management practices is a key focus for banks. This is in response to changes in accounting rules and new prudential and market regulations, which have tightened substantially following the financial crisis. Collectively, these changes are having a deep impact on the market and the way banks price and manage the risk associated with derivatives.

Quanitifi, Ernst & Young and PRMIA, recently hosted a joint seminar in London on ‘Managing counterparty risk & Basel III’. Over 120 senior traders and chief risk officers from leading global and regional banks who attended the seminar were surveyed to gain an insight into the approaches taken towards Counterparty Credit Risk and Basel III.

Key Findings:

  • The majority of banks have Basel III projects in progress (71%) but non are completed
  • Banks continue to trend of creating centralized counterparty risk management groups (CVA desk) to more actively monitor and hedge credit risk (50%), A significant number of banks, however, continue to manage across multiple groups (38%)
  • Data management (46%), analytics (16%), and performance and scalability (16%) are considered the most important component of an effective counterparty risk solution. This is consistent with earlier surveys in 2011 and 2013 by Quantifi.

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Videos

Calculating CVA Capital Charges – Basel III

The global financial crisis brought counterparty credit risk and CVA very much into the spotlight, this webinar explores the capital charges under the two regimes, the capital relief that can be achieved and the potential to reduce the capital charges via eligible hedges.

Whitepapers

Comparing Alternate Methods for Calculating CVA Capital Charges Under Basel III

The global financial crisis brought counterparty credit risk and CVA very much into the spotlight. The Basel III proposals, first published in December 2009, introduced changes to the Basel II rules that reflected the need for a new capital charge against the volatility of CVA.

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CVA, DVA and Bank Earnings

Credit Value Adjustment (CVA) is the amount subtracted from the mark-to-market (MTM) value of derivative positions to account for the expected loss due to counterparty defaults. CVA is easy to understand in the context of a loan – it is the loan principal, minus anticipated recovery, multiplied by the counterparty’s default probability over the term of the loan. For derivatives, the loan amount is the net MTM value of derivative positions with that counterparty.

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