In December 2009, the BCBS published a document entitled “Strengthening the resilience of the banking sector”. This document15 essentially described changes to regulation and capital requirements in response to the, then relatively new, financial crisis. The crisis highlighted many shortcomings of the Basel II regulatory regime, such as insufficient capital levels, excessive leverage, procyclicality and systemic risk. In response to this, a large number of changes were proposed in order to improve upon previous regulation, which make up Basel III (and in the case of revisions to the market risk framework – Basel 2.5).
A large portion of the Basel III changes relate to counterparty credit risk and CVA (over half of the 80-page document mentioned above is concerned with these aspects). After a consultation period, the final Basel III requirements have been published16 in “Basel III: A global regulatory framework for more resilient banks and banking systems”. In this section, we will explain the aspects of Basel III that concern counterparty credit risk (which are substantial) and are affective from 1st January 201317. Note that these changes also depend on aspects such as CRD IV which at the time of writing are not finalised. A brief summary of the changes (note that some affect overall credit risk also) is given below: