The European Central Bank published a Macroprudential Bulletin article assessing the scale and systemic nature of counterparty credit risk (CCR) from banks’ derivatives activities and securities financing transactions. Drawing on supervisory data and the European Banking Authority’s 2023 EU-wide stress test dataset, it concludes that while aggregate CCR in the euro area banking system is limited, exposures are highly concentrated in global systemically important banks (G-SIBs) and investment banks that intermediate heavily with non-bank financial intermediation (NBFI) counterparties, creating scope for sizable losses in a severe, system-wide counterparty shock. CCR amounts to about EUR 340 billion, or 3.9% of significant institutions’ risk-weighted assets, with the bulk of exposure coming from bilaterally cleared activity, particularly non-centrally cleared interest rate derivatives and securities financing transactions. Risk is predominantly mitigated through margining, with around 80% of margins met in cash, which the article flags as a potential source of system-wide liquidity strain if margin calls surge and counterparties are forced to close out trades. NBFIs are the most important counterparty sector after banks, and activity is concentrated, with 10% of repo counterparties accounting for 80% of outstanding transactions. A contagion simulation using non-centrally cleared exposures assumes system-wide defaults of the two most vulnerable NBFI counterparties of each bank, resulting in 77 NBFI defaults and uneven first-round losses across bank business models, with investment banks and asset managers and custodians showing around 150 basis points of CET1 ratio impact; a second-round credit valuation adjustment (CVA) effect adds about 50 basis points on average, exceeds direct losses for 16 banks, and quadruples first-round losses for five banks. The article argues that monitoring CCR-related interconnectedness requires granular, counterparty-level exposure data that capture stress sensitivities and NBFI leverage characteristics, and points to cross-jurisdictional supervisory cooperation as a way to broaden coverage of key counterparty exposures for directly supervised institutions.
European Central Bank 2025-01-01
European Central Bank research finds €340bn euro area counterparty credit risk concentrated in G-SIBs and models contagion from NBFI defaults
The European Central Bank's Macroprudential Bulletin article assesses counterparty credit risk (CCR) from banks' derivatives and securities financing transactions, noting significant concentration in global systemically important and investment banks. Despite CCR being limited to EUR 340 billion or 3.9% of risk-weighted assets, the article warns of potential liquidity strains from margin calls and stresses the importance of granular data and cross-jurisdictional cooperation to monitor interconnectedness. A contagion simulation shows substantial losses, especially for investment banks and asset managers, under system-wide defaults of non-bank financial intermediation counterparties.