The Basel Committee on Banking Supervision has issued its first comment paper on capital requirements for trading book issues. The paper deals with double-default risk and capital requirements for over-the-counter trades.
One banking official said the paper's stance on counterparty credit risk will likely attract the most comment. "That's where the tension is," he noted, explaining the committee's standard for measuring counterparty risk is conservative.
Current risk models don't adequately capture a firm's exposure to the default of one or more issuers, the Basel Committee fears, particularly those for which it has name concentrations across its various trading portfolios, such as bonds, credit derivatives and other structured credit products.
Market participants have been given until May 27 to comment and the Basel Committee intends to release final rules in the summer. The official expects market comment will result in the committee's modification of counterparty credit risk standard.
