Perverse capital

Many banks adjust the value of trades to reflect the possibility of their own default, with the counter-intuitive effect that a rise in their credit spread appears as a profit. Basel refuses to recognise this in bank capital rules, but there is a split on the issue in the industry – and among regulators themselves. Laurie Carver introduces this month’s technical articles

The post-Lehman risk management landscape is different in many ways, but perhaps the most noticeable change is a greater sensitivity to counterparty credit risk. The Basel III capital requirements include a controversial charge for credit value adjustment (CVA) – the market value of changes in counterparty exposure, which regulators claim accounted for roughly two-thirds of banks’ losses during the financial crisis.

The design of the charge has evolved gradually. Flaws in the original equivalent

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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