ECB advises how to calculate exposure to counterparty credit risk
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ECB advises how to calculate exposure to counterparty credit risk 18 September 2020Frankfurt Reporter: Natalie Turner
Image: Grecaud Paul / Adobestock.com
The European Central Bank (ECB) has finalised its guide showing how it assesses banks鈥� compliance with counterparty credit risk models and regulatory requirements.
The guide outlines the methodology the ECB uses to review how euro area banks calculate their exposure to counterparty credit risk and advanced credit valuation adjustment risk.
The follows a public consultation which ended on 18 March.
Counterparty credit risk and advanced credit valuation adjustment risks arise in derivatives trading and in transactions where securities are used to borrow or lend cash, such as repurchase agreements. Both activities entail the possibility that the counterparty may default.
The pandemic has shown that this can be one of the key financial risks that a bank can face, the ECB argues.
Under EU law, banks are allowed to use internal models to calculate the value of their exposures to both these risks as long as these models meet regulatory requirements.
鈥淭he guide should not be construed as going beyond the currently applicable EU and national laws and is therefore not intended to replace, overrule or affect said laws,鈥� the central bank confirms.
The guide comes shortly after the ECB outlined plans to allow euro area banks to exclude some exposures to central banks from their leverage ratio in response to brought on by COVID-19 pandemic.
The move is aimed at easing the implementation of monetary policy by banks and will remain in effect until 27 June 2021.
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Image: Grecaud Paul / Adobestock.com 