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Part III Quantitative Capital Requirements, 8 Credit Risk-Mitigation Techniques and Credit Risk Protection

Bart P.M. Joosen

From: Capital and Liquidity Requirements for European Banks (1)

Edited By: Bart P.M. Joosen, Marco Lamandini, Tobias H. Tröger

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved.date: 27 February 2024

Subject(s):
Bank supervision — Credit risk — Capital adequacy

This chapter assesses credit risk mitigation (CRM) techniques and credit risk protection. Managing the risk of default of bank counterparties is, if possible, the most important objective of banks engaged in lending. The lower the counterparty’s creditworthiness, the stronger the collateral must be for a bank to be prepared to extend its credit. From the perspective of prudential supervision, CRM techniques will be subjected to an in-depth test to determine whether the reduction in credit risk envisaged by the bank may actually lead to a reduction in the weighting of the credit risk on the item concerned for the purpose of capital adequacy. Each bank applies its own techniques and terms and conditions related to lending and credit risk management; this is how banks distinguish themselves from each other. The chapter then looks at the developments in the regulation of CRM in the Basel standards or in Capital Requirements Regulation (CRR), considering the genesis of the rules regarding capital market-driven CRM techniques and the use of financial collateral. It also identifies the general principles of CRM and of funded and unfunded credit protection.

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