ECB Consults on Counterparty Credit Risk Governance and Management
The European Central Bank (ECB) is inviting public opinions on its report on "Sound practices in counterparty credit risk governance and management." The report focuses on the results of a review conducted in 2022 on how banks manage counterparty credit risk (CCR). It outlines good practices observed in the market and highlights areas where banks need to improve. The ECB is urging banks to regularly stress test their counterparty credit risk exposures and assess the vulnerabilities of their counterparties under tail risk scenarios. The consultation period for the report ends on 14 July 2023.
Credit Risk Management: ECB expectations
The ECB's consultation on counterparty credit risk governance and management signals a move towards heightened scrutiny and potentially stricter standards for counterparty credit risk. This is a clear indication of the importance placed on sound risk management to prevent future financial crises. Banks could be expected to enhance customer due diligence, define risk appetite more precisely, improve default management processes, and strengthen stress testing frameworks.
Those found lacking in counterparty credit risk management might face higher capital requirements. Furthermore, the ECB's emphasis on banks proportionately scaling their risk management strategies, depending on the size and complexity of their operations, suggests a shift towards more tailored and efficient risk management practices.
To align with the ECB's expectations, banks should scrutinize the consultation report and assess their current practices in comparison with the recommended sound practices. Where gaps are identified, banks should prepare and implement necessary improvements. This could involve regular stress testing of counterparty credit risk exposures, improving risk modelling capabilities, and scaling risk management efforts based on the size and complexity of the institution.
The consultation period concludes on 14 July 2023. Any regulatory changes stemming from this consultation are likely to be enforced within 6-18 months following this date. This timeframe should provide institutions with sufficient opportunity to adjust and put into action any new procedures. The feedback collected during this period may further refine the timeline and scope of these changes, ensuring a more effective regulation and oversight of banks' risk management practices.
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