A need for a better understanding and ability to control credit risk, driven by regulatory and market pressure, is causing wholesale banks to create a real-time, single view of counterparty exposure across all risk-taking activities, on and off balance sheet. This is one of the ten trends shaping credit risk management, according to SunGard.
“Financial services firms have recognized that they need to manage collateral, market risk and credit risk on an enterprise-wide basis. They will adhere to that principle while launching projects to strengthen their control over credit, trading and counterparty exposure and comply with regulatory requirements such as Dodd-Frank and Basel III,” says Marcus Cree, vice president of risk solutions for SunGard’s Adaptiv business unit.
The other nine trends shaping credit risk management are:
1. To help improve control of counterparty risk, banks need pre-deal global limit checks, supported by efficient processes to manage policy breaches.
2. For a more accurate view of risk, mid-tier banks will need to see market and credit risk exposures leveraging common trade data, market data and risk calculations.
3. New capital adequacy regulations will lead banks to upgrade their counterparty exposure calculation capabilities, notably in areas such as stress testing, back testing, wrong-way risk and credit valuation adjustments (CVA).
4. CVA will become an important calculation as banks strive to quickly understand their risk numbers in order to compute prices before a deal is completed.
5. Banks will upgrade stress testing for credit exposure in response to Basel III’s recommendations on improving stress testing regimes.
6. Banks will need credit systems that can record exposures to central counterparties and/or their clearing members, which will help them monitor capital charges.
7. The move to central counterparty clearing will increase the demand for collateral assets because central counterparties will require initial and variation margin for all deals.
8. Financial institutions continue to look for an enterprise-wide view of collateral in order to help avoid missed collateral calls and reduce the cost of funding and manual processing.
9. Cross-silo collateral optimization will help improve profitability for many institutions by helping them reduce both direct and opportunity costs associated with posting collateral assets.
“Financial institutions are faced with the challenges of meeting many new risk-based regulations and running economically viable credit businesses. Many have started to rebuild their risk technology strategies and move towards integrated risk management. Being able to achieve integration while keeping pace with evolving regulations will be key for financial institutions active in this market segment,” says Peyman Mestchian, managing partner at Chartis Research.
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