The Basel Committee on Banking Supervision announced the completion of the  review of the Basel III capital treatment for counterparty credit risk in bilateral trades. The review resulted in a minor modification of the credit valuation adjustment, which is the risk of loss caused by changes in the credit spread of a counterparty due to changes in its credit quality (also referred to as the market value of counterparty credit risk).

Under Basel II, the risk of counterparty default and credit migration risk were addressed but mark-to-market losses due to credit valuation adjustments (CVA) were not. During the financial crisis however, roughly two-thirds of losses attributed to counterparty credit risk were due to CVA losses and only about one-third was due to actual defaults.

The impact study on Basel III's treatment of counterparty credit risk  showed that the standardised method as originally set out in the December 2010 rules text could be unduly punitive for low-rated counterparties with long maturity transactions. To narrow the gap between the capital required for CCC-rated counterparties under the standardised and the advanced methods, the Basel Committee agreed to reduce the weight applied to CCC-rated counterparties from 18 per cent to 10 per cent.

All other aspects of the regulatory capital treatment for counterparty credit risk and CVA risk remain unchanged from the December 2010 Basel III rules text. Overall, the Committee estimates that, with the addition of the CVA risk capital charge, the capital requirements for counterparty credit risk under Basel III will double the level required under Basel II (i.e. when counterparty credit risk was capitalised for default risk only). A revised version  of the Basel III capital rules reflecting the CVA modification is now available.

The Committee is in the process of completing its review of capitalisation of bank exposures to central counterparties (CCPs), and expects to finalise its proposals before year end.

Press release