Credit Suisse, UBS counterparty exposures ballooned in Q2

Top Swiss banks’ exposures to derivatives and securities financing transactions (SFT) counterparties leapt over the first half of this year, though the build-up did little to change the overall riskiness of their portfolios.

At UBS, counterparty exposures-at-default (EAD) hit $125.4 billion at end-June, up 20% on six months prior. Risk-weighted asset (RWA) amounts calculated for these exposures, though, rose a more modest 12% to $38.6 billion. Including exposures to central counterparties (CCPs), these RWAs totalled almost $40 billion.

At Credit Suisse, EAD spiked 45% to Sfr 97.2 billion ($106.1 billion) over the first half, and RWAs 20% to Sfr 22.6 billion – or Sfr 23.9 billion including CCP exposures.


The discrepancy in EAD and RWA moves at both banks can be traced to the risk-weighting of the additional exposures they took on over the six months to end-June.

The majority of derivatives and SFT exposures at both banks are risk-weighted using their respective internal models. At UBS, exposures captured using its internal ratings-based (IRB) approach increased $20 billion over the half, but 75% of this increase was to counterparties with a probability of default (PD) of less than 0.15%, the lowest risk-weighting bucket.

Credit Suisse saw its IRB exposures climb 48% to Sfr 30.2 billion over the period, with fully 91% of the increase attributable to the lowest risk-weighted trading partners.

The story was different for each bank’s exposures as captured by the standardised approach (SA). At UBS and Credit Suisse, these made up just 6% and 5% of overall EAD. But SA exposures with a 100% risk-weight made up 68% of the half-on-half increase at UBS. At Credit Suisse, though SA exposures overall fell marginally over the half, those with a 100% risk-weight surged 21%.


What is it?

RWAs for counterparty credit risk (CCR) exposures are assigned to over-the-counter derivatives and repo-style transactions, as well as to amounts handed over to CCPs as default fund contributions.

RWAs for derivatives are generated using either a bank’s internal model method or the standardised approach for counterparty credit risk (SA-CCR) developed by the Basel Committee. For SFT exposures, credit risk mitigation approaches can be used, alongside a value-at-risk formula. 

Why it matters

At US banks, not only have counterparty exposures climbed, so have the overall riskiness of their portfolios, as measured using PD. That Swiss banks haven’t seen their RWAs leap as high as exposures reflects the fact that their EAD increases relate to higher trading volumes from established clients with high creditworthiness.

Though EAD under the standardised approach makes up just a fraction of their overall portfolios, both Credit Suisse and UBS may be incentivised to cut these even further with the introduction of the standardised approach for counterparty credit risk (SA-CCR), because of the methodology’s RWA-inflating effect. At Credit Suisse, SA-CCR RWAs totalled Sfr3.7 billion on Sfr10.6 billion of EAD, for a risk density of around 35%. Its IRB-assessed exposures, on the other hand, had an overall risk density of 24%.

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Swiss banks plumped liquidity buffers in Q2

Top US banks’ counterparties’ credit quality deteriorated in Q2

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