Regulatory Alerts2013-12-11 | BSD/DIR/CIR/GEN/LAB/06/053/1Regulatory Capital Measurement and Management Framework for the Implementation of Basel II/III for the Nigerian Banking System
The EBA guidelines for the Standardised Approach to Counterparty Credit Risk consist of three pillars. Pillar 1, which accounts for over 90% of institutions' credit risk, is based on default probability and loss-given-default estimates. Pillar 2 measures the amount of capital that should be allocated to cover unexpected losses. Lastly, Pillar 3 focuses on governance, disclosure and market discipline aspects. Here are some notable points from these guidelines: 1. A credit valuation adjustment (CVA) is required for all non-zero exposures. 2. Banks have the option to choose between a standardized approach or an internal ratings-based approach for counterparty credit risk. 3. The supervisory treatment of claims on banks should be consistent with that for other entities, unless they pose a higher risk than other counterparties or are subject to specific preferential treatment due to their importance for the financial stability. 4. Banks can apply an H=0 for certain repo-style transactions. 5. There is an exemption from capital requirements for foreign exchange risk when the exposure is fully hedged in the same currency and the bank is not acting as principal counterparty. These guidelines, therefore, provide a robust framework to assess and manage the risks associated with counterparties.