ECB consults on counterparty credit risk governance and management

The ECB has initiated a public consultation on its report titled „Sound practices in counterparty credit risk governance and management“.
This report presents the findings of a targeted review conducted in the latter half of 2022, assessing how banks govern and manage CCR. While the report acknowledges the existence of good practices in the market, it also highlights areas that require improvement.
CCR has been identified as a supervisory priority for the period of 2022-24 due to banks increasingly providing capital market services to riskier, leveraged, and less transparent counterparties. This trend has been driven by the pursuit of higher yields in the low-interest rate environment prevalent at the time. In particular, the conflict in Ukraine and resulting energy and commodity price volatility drew attention to banks‘ exposures to energy utilities and commodity traders.
In 2023, the ECB’s Banking Supervision conducted off-site follow-up activities at 23 banks engaged in derivatives and securities financing transactions with non-banking counterparties. Additionally, on-site inspections were carried out in some instances. The review discovered that although there has been progress in how banks measure and manage CCR, there is still room for improvement in various areas. These areas include customer due diligence, risk appetite definition, default management processes, and stress testing frameworks.
Supervisors expect banks to possess the ability to gather information from non-bank counterparties, regularly subject their counterparty credit risk exposures to stress tests, and evaluate their counterparties‘ vulnerabilities under tail risk scenarios. The report emphasizes that the good practices outlined extend beyond mere compliance with regulatory requirements and should be taken into consideration when designing banks‘ approach to CCR. The approach taken by banks should be proportionate to the scale and complexity of their business and products, as well as the nature of the counterparties involved.
The consultation period for the report begins on the launch date and concludes on 14 July 2023. The ECB seeks feedback primarily from banks and practitioners directly involved in CCR management. The received comments will be published along with a summary feedback statement and the final version of the report.