RSM432H1 Lecture Notes - Lecture 6: Credit Risk, Basel Ii, Basel I
Document Summary
Refers to clause in derivatives agreements which states that if company defaults on one transaction, must default on all transactions. 1998 accord netting modification in 1995, banks can reduce credit equivalent totals if bilateral netting agreements were present. Netting allows firms to reduce exposure to each counterparty. Firm a has a 60, -50, and 60 exposure with firm b. Net replacement ratio (used for add-on calculation): aj represents a risk-coefficient depending on the risk level of the product. No counterparty risk if the product is cleared through a clearinghouse. Regulators would like more trades to go through central clearing parties. However, little data to show whether ccp can absorb losses if many counterparties defaulted. Amendment requires banks to measure and hold capital for market risk for all instruments in trading book including off balance sheet items. Before, capital requirement only looked at credit and counterparty risk and ignored market risk. Capital requirement assigned separately to each type of asset.
