On 11 December 2024, the Basel Committee on Banking Supervision (Basel Committee) published final guidelines for counterparty credit risk (CCR) management. The guidelines will replace the Basel Committee’s ‘Sound practices for banks’ interactions with highly leveraged institutions’ published in January 1999.

CCR

CCR is the risk that the counterparty to a transaction could default before the final settlement of a transaction’s cash flows. CCR is a multi-dimensional form of risk, affected by both the exposure to a counterparty as well as the credit quality of the counterparty, both of which can be sensitive to highly dynamic and fast-moving changes in financial markets.

Guidelines

The guidelines are designed to be broadly applicable to manage banks’ CCR exposures to all types of counterparties although the greatest potential benefits are expected to be in cases where banks have high-risk exposures to counterparties, including non-bank financial intermediaries (NBFIs).

Whilst the guidelines are intended to be comprehensive, they place particular emphasis on key practices critical to resolving long-standing industry weaknesses in CCR management. These include the need to:

  • Conduct comprehensive due diligence at both initial onboarding, as well as on an ongoing basis to ensure banks have a full understanding of the risks they are taking before they make key credit risk decisions, and that they are able to act swiftly and with sufficient information on the changing risk profiles of counterparties during times of stress.
  • Develop a comprehensive credit risk mitigation strategy to effectively manage the inherent risk of their counterparty exposures using robust contractual terms and tools such as risk-sensitive margining.
  • Measure, control and limit CCR using a wide variety of complementary metrics while ensuring CCR metrics comprehensively cover the bank’s range of material risks, portfolios and counterparties.
  • Build a strong CCR governance framework that leverages skilled individuals from across the organisation who have a clear sense of the bank’s risk culture; is guided by clear risk management  processes, including limits and escalations; and is supported by informative and reliable reporting that is integrated into decision-making processes.

Next steps

The Basel Committee encourages full adoption of the guidelines by its members, particularly for their internationally active banks, as soon as possible. It will continue to monitor implementation of the CCR management guidelines on an ongoing basis.