Single Counterparty Credit Risk Limits

The global banking community has long debated the best path forward for managing credit risk following the 2008 financial crisis with two types of strategies—strict risk limits, capital charges or a combination of both—have already been variously implemented as or are in finalization. Capping the risk to a single counterparty as a percentage of total capital on hand is one way of doing this, particularly in order to limit excessive exposure between systemically important banks and thus avoid any potential domino effect should one of them fall into distress. This idea, combined in the US with an additional Total Loss Absorbing Capacity (TLAC) assessment, features prominently as a tenet of capital adequacy.

On a technology level, marrying aggregate exposures data with firm-level capital data—two sets of information traditionally sitting in separate parts of the bank—is one major challenge, while keeping each of these accurate and up to date is yet another. Valuation adjustments (capital charges) have proven contentious as a matter of regulatory mandate; the industry continues to argue over risk limit percentages, too. But banks now have both natural and compliance-driven motivations to be as precise as possible regarding single counterparty exposure. AxiomSL’s historical strength in risk data aggregation can help them get there.

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