Template:Crmtechniques: Difference between revisions

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*transfer under a [[pledged collateral arrangement]] — at least [[to the exent]] that the bank doesn’t surrender legal title<ref>Do not get me started on [[rehypothecation]].</ref> to the collateral at all — will leave the bank with no counterparty {{tag|credit exposure}} at all to the haircut or excess, seeing as it is the bank’s, and if the counterparty goes [[bust]], the bank will be entitled to have it returned in full.
*transfer under a [[pledged collateral arrangement]] — at least [[to the exent]] that the bank doesn’t surrender legal title<ref>Do not get me started on [[rehypothecation]].</ref> to the collateral at all — will leave the bank with no counterparty {{tag|credit exposure}} at all to the haircut or excess, seeing as it is the bank’s, and if the counterparty goes [[bust]], the bank will be entitled to have it returned in full.
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Revision as of 14:30, 19 September 2018

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

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CRM techniques under the Basel Standardised Approach to Credit Risk framework are broken down as follows:

Now note a fundamental difference between legally enforceable netting arrangements and Guarantees: In a netting arrangement the full value of the offsetting transaction fully and automatically cancels out the corresponding exposure. There are no contingencies. By contrast, collateral arrangements that don’t amount to enforceable netting arrangements, guarantees and CDS transactions all depend for their effectiveness on the solvency of the person providing the credit mitigation – if the credit support provider fails, so does the credit mitigation and the exposure remains.


An Important point

Note the difference between 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:

  1. This is what it says, and I suppose it is true, even though “hedging” is a curious way of describing it
  2. In many cases (e.g. the ISDA Master Agreement a collateral arrangement will be delivered under a “transaction”, and so will explicitly be a master netting arrangement
  3. Do not get me started on rehypothecation.