BankersAccuity: Europe’s Changing Landscape Highlights Counterparty Credit Risk

The recent
‘European Counterparty and Credit Risk Conference’
, held in London, highlighted several major themes facing risk management professionals in Europe, with the constantly changing landscape turning counterparty credit risk into a major issue says BankersAccuity.

Key industry trends such as Basel III, stress testing and portfolio management were among this year’s themes and discussion at the conference centred on the day-to-day challenges faced by risk management professionals, the group reports. With diminishing trust in the rating agencies and investment in the emerging markets, the requirement for in-depth analysis is as critical as ever.

Although the banking crisis is no longer at its peak, several banks in European member states are still in a fragile position. Greece in particular is still in crisis, suffering from a complete collapse of credit. A key challenge for Greece is what can be done now. Too much credit causes more credit risk, and too little credit stops growth.

Emerging markets however are no longer the uncharted markets they were before the banking crisis. They are now viewed as advancing economies with growth opportunities to continually improve economic and political conditions.

A key trend in the industry is counterparty credit risk under wrong-way risk, when default risk and credit exposure increase together. In 2001, Basel II highlighted an issue of wrong-way risk as an area which should be specifically addressed by banks in their risk management practice. Wrong-way risk has recently become an area of concern for risk managers due to the advancements in credit derivative trading that brings credit-worthiness into the trading book as a market factor.

“The banking crisis has left many European member state banks in an unstable and fragile position, which is shown by the fact that the share of non-performing Loans (NPLs) is increasing in many of these countries,” commented Guy Sheppard, senior product manager at BankersAccuity.

“Due to the banking crisis and the subsequent market volatility, credit risk is under increased attention. Banks are beginning to adopt internal models for credit risk to deal with the greater scrutiny. At BankersAccuity, we’re endeavouring to assist struggling risk management professionals to deal with the ongoing challenges they face and the continuous flow of assessment and reassessment of existing counterparty risk exposure.”

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