News

ECB review of counterparty credit risk

In search for yield during the low interest rate environment, banks have increased the volume of capital market services provided to riskier and less transparent counterparties, including non-bank financial institutions (NBFIs), such as hedge funds and family offices. The European Central Bank (ECB) is concerned about the counterparty credit risk (CRR) involved in these activities and published supervisory expectations already in August 2022. Later in 2022, the ECB conducted a review of the governance and high-level risk management of CCR at 23 banks. The review identified some progress in how institutions measure and manage CCR but also identified several material shortcomings compared to the supervisory expectations. The ECB recommends that banks:

• Reinforce their client due diligence procedures
• Specify their willingness to accept CCR risk in their risk appetite statement
• Step up their efforts to develop appropriate stress testing capabilities for CCR
• Improve their management of CCR when a counterparty is in trouble or defaults

The ECB announces that they will use the full spectrum of supervisory tools to ensure that supervised banks promptly address weaknesses in their risk management frameworks.