Counterparty calamity: inside Basel's new standard charge
The new standardised approach to counterparty credit risk can produce risk-weighted asset numbers up to three times higher than those generated by internal models. This could be bad news, when combined with the planned system of standardised capital floors
Standardised, regulator-set approaches to the calculation of bank capital generally look conservative when compared with banks' own, more risk-sensitive capital models. That is a given, so it's no surprise the proposed new standardised approach to counterparty credit risk (SA-CCR) is set to generate numbers two to three times higher than under a typical internal model.
What makes this outcome newly significant is the proposal for a system of capital floors for banks that use the internal model
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