Banks Are Not Ready for Counterparty Risk Elements of Basel lll

Basel III significantly changes the way in which financial institutions address counterparty credit risk (CCR) and credit value adjustment (CVA).

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.

Basel III significantly changes the way in which financial institutions address counterparty credit risk (CCR) and credit value adjustment (CVA). While the majority of banks (71%) are attempting to gear up for the regulatory changes and are actively managing CVA, the complexity and cost of implementing the required infrastructure across all divisions of the bank remains a difficult task.

Counterparty credit risk requires an enterprise solution and introduces considerable data management and integration challenges. Respondents voted data management as the most important component for an effective counterparty risk solution (46%). This is consistent with Quantifi’s survey ‘How do you manage your counterparty credit risk’ in 2011 where respondents rated data management as the largest challenge within existing counterparty risk management systems (64%).

Banks are now taking a ‘top-down’ approach to risk management. A key component of the top-down approach to risk management is the central CVA desk or counterparty risk group. A large number of banks (50%) have created centralised counterparty risk management groups (CVA desks) to more actively monitor and hedge credit risk.

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