BCBS consults on guidelines for counterparty credit risk management

The Basel Committee on Banking Supervision (BCBS) is seeking comments, until August 28, 2024, on guidelines for counterparty credit risk management of banks. The guidelines are expected to be used to manage banks’ counterparty credit risk exposures to all types of counterparties while a risk-based and proportional approach is encouraged for the application of the guidelines.

The guidelines include key practices critical to resolving long-standing industry weaknesses in counterparty credit risk management, including the need to:

• conduct comprehensive due diligence of counterparties both at initial onboarding and on an ongoing basis. The aim is to ensure banks have a full understanding of the risks they are taking before they make key credit risk decisions and that they are able to act swiftly and with sufficient information on the changing risk profiles of counterparties during times of stress.
• develop a comprehensive credit risk mitigation strategy to effectively manage counterparty exposures. This entails the use of robust contractual terms and tools such as risk-sensitive margining
• measure, control, and limit counterparty credit risk using a wide variety of complementary metrics. This should be done while ensuring that counterparty credit risk metrics comprehensively cover the bank’s range of material risks, portfolios, and counterparties.
• build a strong counterparty credit risk governance framework. This should be guided by clear risk management processes, including limits and escalations, and supported by informative and reliable reporting that is integrated into decision-making processes.

The Basel Committee encourages banks and supervisors to use the guidelines to identify potential areas for improvement in counterparty credit risk management practices. The greatest potential benefit in terms of improvements in counterparty credit risk management are expected to be in cases where banks have high-risk exposures to non-bank financial intermediary counterparties or NBFIs.

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Related Links

• Press Release
• Proposed Guidelines (PDF)