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Credit risk mitigation: Difference between revisions
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===An Important point to note=== | ===An Important point to note=== | ||
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'', a title-transfer collateral arrangement whereby a bank transfers outright 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 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. | 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'', a title-transfer collateral arrangement whereby a bank transfers outright 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 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. | ||
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===Bedtime reading=== | ===Bedtime reading=== | ||
*[http://www.bis.org/bcbs/publ/d347.pdf Second consultative document on revisions to the Standardised Approach to Credit Risk] HEY! WAKE UP! | *[http://www.bis.org/bcbs/publ/d347.pdf Second consultative document on revisions to the Standardised Approach to Credit Risk] HEY! WAKE UP! | ||
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