WASHINGTON, D.C.— Shayna Olesiuk, Director of Banking Policy, issued the following statement in connection with the Basel Committee on Banking Supervision’s (Committee) final guidelines for counterparty credit risk management.

“We commend the Committee’s eye-opening look at the need to address material weaknesses in counterparty credit risk management at the global megabanks. As we explained in our comment letter, these exposures are large, opaque, and have the potential to amplify economic shocks and send the financial system into crisis, at great cost to consumers, taxpayers, and small businesses. They are ticking time bombs that have been largely ignored—other than rhetorically—for far too long.

“Counterparty credit risk (“CCR”) refers to the risk of nonpayment of amounts owed. If I lend $10 to a friend, that friend is my counterparty and my CCR exposure is $10. A megabank may have CCR from financing the trading activity of hedge funds, from its extensive network of derivatives contracts with other megabanks, nonbank financial firms, and others, or from borrowing and lending securities for a variety of purposes. These activities create risks that are complex and consequential.

“Unfortunately, the 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 counterparty credit risk 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.”

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