At the end of 2014 the Basel Committee on Banking Supervision (BCBS) conducted a hypothetical test portfolio exercise (HPE) to examine variability in banks’ modelling of derivatives, and specifically in exposure modelling. This was the first HPE by the BCBS that focused on counterparty credit risk (CCR) risk-weighted assets (RWA) and covered the internal models method (IMM) and advanced credit valuation adjustments (CVA) risk capital charge for over-the-counter derivative trades.

Nineteen internationally active banks from 10 jurisdictions participated in the exercise which allowed the BCBS to gain a deeper understanding of the observed variability and identification of key drivers.

The BCBS has now issued a report following the HPE which is entitled Report on risk-weighted assets for counterparty credit risk. Chapter 1 of the report presents the key findings and lists a number of policy recommendations and observed sound practices that the BCBS may consider when seeking to mitigate the variability in outcomes for the Basel capital standards.

The analysis in the report shows considerable variability in the outcomes of CCR models. The variability is typically somewhat higher for CVA models than for IMM models. Overall, the level of variability is broadly similar to the variability of other market risk model outcomes observed in previous exercises. Key drivers for the variability include differences in banks’ modelling choices, as well as differences in supervisory practices.

View Regulatory Consistency Assessment Programme – report on risk-weighted assets for counterparty credit risk, 1 October 2015