Better Markets filed a comment letter to the Basel Committee on Banking Supervision (Committee) on a proposed Amendment to its counterparty credit risk (CCR) framework.

Why It Matters. A counterparty is defined as the “other side” of a financial transaction and CCR is defined as the risk that that “other side” will not be able to fulfill their side of a financial agreement, such as repaying a loan. Megabanks and internationally-active banks have CCR from a variety of sources, including financing the trading activity of hedge funds; an extensive networks of derivatives contracts with other megabanks, nonbank financial firms, and others; and from borrowing and lending securities for a variety of purposes. Without adequate regulatory guardrails, these activities create risks that are like ticking time bombs, that have the potential to amplify economic shocks and send the financial system into crisis.

Using the example of the failed Credit Suisse’s exposures to Archegos Capital Management, the BCBS itself has explained how the weaknesses in its CCR framework can result in grossly inadequate capital requirements for the true risks facing banks.  By not acting to fix these problems, the BCBS exposes the public to the risk of repeated financial crises and bailouts of megabanks.

What We Said. The Committee’s proposed Amendment to the CCR framework is a commendable technical improvement, but it only addresses a small part of a much larger problem.

As we explained in our response to the Committee’s release of final guidelines in December 2024, guidelines do nothing to fix the governing regulations whose weaknesses the Committee has so perceptively described. The hope appears to be that the industry will finally do a better job of identifying, measuring, managing, and controlling their CCR exposures if they are urged again to do so. However, the Fed itself says that supervisory guidance is not enforceable. Until national supervisors—like the Fed—put strong rules in place to limit and control megabanks’ high-risk counterparty exposures, Main Street Americans and financial stability will continue to be threatened.

Bottom Line. The Committee’s proposed Amendment is a step in the right direction because it will indeed close an identified loophole, but serious CCR remains.