The Basel Committee on Banking Supervision has released definitive guidelines for managing counterparty credit risk (CCR).
These guidelines aim to replace the existing “Sound practices for banks’ interactions with highly leveraged institutions” established in January 1999. This update is a critical advancement in addressing persistent industry weaknesses identified over the years, particularly those highlighted by recent stresses in non-bank financial intermediaries (NBFIs).
The newly issued guidelines emphasize the importance of robust due diligence processes for counterparties. Banks are required to conduct thorough initial and ongoing evaluations to better understand and mitigate risks associated with their interactions. Furthermore, the development of a comprehensive credit risk mitigation strategy is mandated to effectively manage exposures. The guidelines also call for the use of diverse metrics to measure, control, and limit CCR effectively and urge the establishment of a strong governance framework to oversee these processes.
The consultation process leading to these guidelines saw significant input from various stakeholders, underscoring the collaborative effort in refining the CCR management approach. While the guidelines are designed to be broadly applicable to all types of counterparties, they are especially crucial for managing high-risk exposures to NBFIs.
The Basel Committee has urged all member banks, particularly those with international activities, to adopt these guidelines promptly. The committee plans to continuously monitor the implementation of these guidelines to ensure effective management of CCR across the banking sector.
Basel Committee spokesperson Julian Morgan said, “These guidelines are a step forward in fortifying the banking industry against the kinds of risks that have emerged more clearly in recent times. They are about building resilience where it is most needed.”
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