This chapter explains the meaning of counterparty credit risk and sets out the various approaches within the Basel framework that banks can use to measure counterparty credit risk exposures.

Version effective as of 01 Jan 2023

Changes to introduce minimum haircut floors, as set out in the December 2017 Basel III publication and the revised implementation date announced on 27 March 2020.

Introduction

51.1 Banks are required to identify their transactions that expose them to counterparty credit risk and calculate a counterparty credit risk charge. This chapter starts by explaining the definition of counterparty credit risk. It then sets out the various approaches that banks can use to measure their counterparty credit risk exposures and then calculate the related capital requirement.

Counterparty credit risk definition and explanation

51.2 Counterparty credit risk is defined in CRE50. It is the risk that the counterparty to a transaction could default before the final settlement of the transaction in cases where there is a bilateral risk of loss. The bilateral risk of loss is the key concept on which the definition of counterparty credit risk is based and is explained further below.

51.3 When a bank makes a loan to a borrower the credit risk exposure is unilateral. That is, the bank is exposed to the risk of loss arising from the default of the borrower, but the transaction does not expose the borrower to a risk of loss from the default of the bank. By contrast, some transactions give rise to a bilateral risk of loss and therefore give rise to a counterparty credit risk charge. For example: