Exposure under systemic impact

Wrong-way risk (WWR) behaves differently for exposures to systemically important counterparties because their default has the potential to move financial markets before the close-out. Michael Pykhtin and Alexander Sokol show how the traditional exposure simulation framework can be adapted to account for this systemic WWR. They illustrate how the model can be calibrated by using market credit default swap spreads and historical defaults – including those of Russia, Argentina and Lehman Brothers

dynamic explosion

The financial crisis of 2007–2009 has emphasised the importance of measuring and managing counterparty credit risk (CCR) for all market participants. The collapse of Bear Stearns, Lehman Brothers and Wachovia showed that even the largest financial institutions can fail. In particular the Lehman Brothers’ default illustrated that failure of a large financial institution can disrupt world markets and adversely affect the world economy. In the wake of the crisis, the Basel Committee on Banking Supervision (2010) introduced the notion of systemically important financial institutions (Sifis), which will be subject to an additional capital surcharge.

Exposure under systemic impact

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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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