Are banks ready for Counterparty Credit Risk under Basel III

Maturity across the Counterparty Credit Risk (CCR) and Credit Valuation Adjustments (CVA) space varies greatly across the industry. Our recent survey provided some interesting insights as to whether banks are ready for CCR and CVA under Basel III, thanks to detailed responses from our clients and academic participants.

We found that there are clear differences of opinion between academics and practitioners particularly when it comes to Basel III readiness for CCR. The same is reflected with regards to banks having access to the right people and the right technology to effectively calculate and manage CVA.

However, from our survey responses, most banks themselves feel they do have access to the right people and talent but struggle with technology requirements, particularly with access to data. This is very much the crux of the issue facing the industry - CCR is a hybrid product and modelling it accurately requires several data sets which have not historically been combined for use regularly. Over 70% of the survey participants are now reviewing their credit support annex (CSA) and collateral agreement data in a bid to prepare for Basel III. Speaking from personal insight, further challenges will likely arise due to restrictions created by legacy systems, organisational alignment and computing power required.

Added sophistication, be it of process, technology or people, will come at a price, and there is a trade-off to be made between precision and cost of the overall architecture. This balance must be struck for the risk managers, quants and technologists who will use it and will be vastly different for each organisation.

Indeed, while most of the big names are well on their way to building their CCR management systems, several smaller banks are still trying to understand how far they need to go to be ready.

Clearly the stakes are high. They are further compounded by uncertainty around regulatory timelines, the extent to which the OTC market can move to a central clearing model and the capital charges and P&L volatility which CCR brings. Banks certainly need to start preparing now so they are not caught out further down the line.