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Integration of Market and Credit Risk

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Since 1997 Business & Decision has developed skills and vision in the area of Value at Risk (VaR), Economic Capital and Counterparty Credit Risk. Experience and lessons learned from those areas will ensure an efficient integration of the market and credit risks while, at the same time, minimizing the costs of compliance. 

Incremental risk Charge

The Basel Committee on Banking Supervision released on the 22nd of July 2008 revised proposals that introduce a capital charge for incremental risk in the trading book.

These new rules set forth by the Committee find their basis in a first consultation paper that introduced an Incremental Default Risk Charge in response to the increasing amount of exposure in bank's trading books to credit-risk related and often illiquid products whose risk is not reflected in VaR.

Even if the committee kept the guidelines of that previous publication, they enhanced their first text in order to encompass a wider range of price risks beyond default. Indeed the global credit crisis showed that the majority of losses experienced by banks in recent months were not the result of actual default. None would have the application of an incremental default risk charge captured recent losses in CDOs, ABS and other resecuritizations held in the trading book. The losses that materialized during the market turmoil have not arisen from actual default but rather from credit migrations combined with widening of credit spreads and the loss of liquidity.

Our consultants can assist you in implementing those new regulatory requirements for the trading book. Since 1997 B&D has developed skills and vision in the area of VaR, Economic Capital and Counterparty Credit Risk. Experience and lessons learned from those areas will ensure an efficient integration of the market and credit risks while, at the same time, minimizing the costs of compliance.

Counterparty Credit Risk

Among all the risks they face, credit risk is the one, financial institutions are the most familiar with. It is also the risk to which supervisors of financial institutions pay the closest attention, undoubtedly because it has been the risk most likely to cause a bank to fail.

Among the various types of credit risks, the counterparty credit risk applies to derivative and repo transactions in over-the-counter markets. Unlike more traditional banking instruments, the credit exposure on those products is highly volatile and depends on the market risk factors evolution. Because professional counterparties deal on a wide range of products and underlyings, assessing exposure in a timely manner is a real challenge, both for monitoring and capital calculation purposes.

Business & Decision knows the complexity and pitfalls of counterparty credit risk measurement. Our consultants provide insight on the right framework to put in place, either with a pragmatic "add-on" approach or with an elaborate stochastic Potential Future Exposure approach.