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Credit risk mitigation: Difference between revisions
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[[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 [[leverage ratio denominator|denominator]], as percolated by that splendid assembly of prudent Schweizers, the [[Basel Committee on Banking Supervision]]. | [[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 [[leverage ratio denominator|denominator]], as percolated by that splendid assembly of prudent Schweizers, the [[Basel Committee on Banking Supervision]]. | ||
===[[ | ===[[Credit risk mitigation techniques]]=== | ||
Banks may use [[credit 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: | [[CRM technique]]s are broken down as follows: | ||
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{{Box| | {{Box| | ||
===An Important point === | ===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'', 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 {{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. | 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. | ||
}} | }} | ||