Credit risk mitigation: Difference between revisions

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Banks may use [[credit risk mitigation technique]]s (jauntily known as “[[CRM technique]]s” or even “[[CRM tool|tool]]s”) to reduce the impact on their capital calculations of counterparty [[credit exposure]] in their trading businesses.
Banks may use [[credit risk mitigation technique]]s (jauntily known as “[[CRM technique]]s” or even “[[CRM tool|tool]]s”) to reduce the impact on their capital calculations of counterparty [[credit exposure]] in their trading businesses.


[[CRM technique]]s are broken down as follows:
*'''[[Title transfer collateral arrangement|Collateralised transactions]]''': A bank has a [[credit exposure]] which it hedges<ref>This is what it says, and I suppose it is true, even though this is a curious way of describing it</ref> [[in whole or in part]] by {{csaprov|collateral}} posted by a counterparty or a [[credit support provider]].
*'''On-[[balance sheet]] {{tag|netting}}''': Legally enforceable [[close-out netting]] arrangements covering multiple transactions with offsetting [[mark-to-market]] values.
*'''{{tag|Guarantee}}s and [[credit derivative]]s''': {{tag|Guarantees}} provided by third parties (whose [[credit risk]] isn't materially correlated to the counterparty’s) or {{tag|credit derivative}} transactions.
{{Box|
===An Important point ===
Note the difference between [[CRM technique|techniques]] which mitigate a credit risk that you nonetheless have — as above — and those which negate the [[credit exposure]] in the first place. So, ''par example'', a [[title-transfer collateral arrangement]] whereby a bank transfers outright {{tag|collateral}} to a counterparty may, as part of  a valid netting agreement, mitigate that collateral but will leave you with an exposure to any [[excess collateral]] or [[haircut]]; however transfer under a [[pledged collateral arrangement]] — at least [[to the exent]] that you don't surrender legal title to the collateral at all — will leave you with no counterparty {{tag|credit exposure}} at all to the haircut or excess, seeing as it is yours, and if the counterparty goes [[bust]], you will be entitled to have it returned in full.
}}


===Bedtime reading===
===Bedtime reading===

Revision as of 18:20, 8 November 2016

Credit risk mitigation is a concept of great interest to those concerned with the capital position of financial institutions. Things like the leverage ratio and its fabled denominator, as percolated by that splendid assembly of prudent Schweizers, the Basel Committee on Banking Supervision.

Credit risk mitigation techniques

Banks may use credit risk mitigation techniques (jauntily known as “CRM techniques” or even “tools”) to reduce the impact on their capital calculations of counterparty credit exposure in their trading businesses.


Bedtime reading


References

Regulatory Capital Anatomy™
The JC’s untutored thoughts on how bank capital works.

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