Basel Framework International regulatory standards for banks |
---|
Background |
Pillar 1: Regulatory capital |
Pillar 2: Supervisory review |
Pillar 3: Market disclosure |
Business and Economics Portal |
The standardized approach for counterparty credit risk (SA-CCR) is the capital requirement framework under Basel III addressing counterparty risk for derivative trades. [1] It was published by the Basel Committee in March 2014. [2] See Basel III: Finalising post-crisis reforms.
The framework replaced both non-internal model approaches: the Current Exposure Method (CEM) and the Standardised Method (SM). It is intended to be a "risk-sensitive methodology", i.e. conscious of asset class and hedging, that differentiates between margined and non-margined trades and recognizes netting benefits; considerations insufficiently addressed under the preceding frameworks.
SA-CCR calculates the exposure at default, EAD, of derivatives and "long-settlement transactions" exposed to counterparty credit risk, where EAD = 1.4 × (RC + PFE). The multiplier of 1.4 is a buffer ensuring sufficient coverage; and:
The SA-CCR EAD is an input to the bank's regulatory capital calculation where it is combined with the counterparty's PD and LGD to derive RWA; Some banks thus incorporate SA-CCR into their KVA calculations. Because of its two-step aggregation, capital allocation between trading desks (or even asset classes) is challenging; thus making it difficult to fairly calculate each desk's risk-adjusted return on capital. Various methods are then proposed here.[3] SA-CCR is also input to other regulatory results such as the leverage ratio and the net stable funding ratio.
© MMXXIII Rich X Search. We shall prevail. All rights reserved. Rich X Search