Industry views on credit risk mitigation

This version

BCBS  | 
Sound practices
21 January 2000
Status:  Superseded
PDF full text
 |  22 pages
Topics: Credit risk


In its Consultative Paper on a New Capital Adequacy Frameworkof 3 June 1999, the Basel Committee on Banking Supervision (the Committee) stated its plans to refine its approach to the treatment of credit risk mitigation techniques in the banking book. The Committee is looking to develop a more consistent and economic approach to these techniques, covering collateral, guarantees, credit derivatives and on-balance sheet netting.

The Committee acknowledges the benefits that can accrue from the use of credit risk mitigation techniques and the key role they can play in prudent risk management. The Committee also acknowledges the impact that regulatory requirements may have on market practices. Accordingly, the Committee believes it is important that the capital framework should afford a better recognition of risk mitigation techniques, reflecting the significant increase in recent years in the use and range of such techniques, as well as in the ability to manage the associated risks.

The Capital Group (the Group) of the Committee prepared a paper ("Issues related to Credit Risk Mitigation Techniques"1) as a basis for discussion between the bank supervisors of the G10 countries and over 50 banks and industry associations within their jurisdiction. The purpose of the paper was to seek information on how credit risk mitigation techniques are used within risk management systems and to elicit some initial thoughts on the issues discussed in the Consultative Paper. Discussions were held with a cross-section of banks, including large internationally active banks with complex businesses and small domestic banks that primarily focus on traditional banking activities.2This document provides a summary of the views expressed by the banks surveyed and is intended to prompt further discussions on the topic with the industry.

The summary is divided into two main sections. The first section covers general points on the use of credit risk mitigation techniques by banks and their treatment under the Accord. The second section discusses individual topics such as residual risks (i.e. risks arising from maturity mismatches, market price changes and asset mismatches), the extent of risk reduction, and issues relating to individual credit risk mitigation techniques (collateral, guarantees and on-balance sheet netting). The Group welcomes further comments on current bank practice and further suggestions for changes to the Accord.

1The contents of the issues paper are included in this document.
2The present Capital Accord and the proposed new framework are both targeted at internationally active banks. However, the Committee acknowledges that many countries apply the Capital Accord, in some form or another, to domestic banks. The objectives for the new framework state that the Accord "should be suitable for application to banks of varying levels of complexity and sophistication".