Counterparty risk refers to the potential for loss that one party in a financial transaction faces if the other party fails to fulfill their contractual obligations. This risk is particularly relevant in trading, derivatives, and lending activities, where the default of a counterparty can lead to significant financial losses. Factors influencing counterparty risk include the creditworthiness of the counterparties, market conditions, and the complexity of the financial instruments involved. Effective management involves thorough due diligence, regular monitoring of counterparty credit quality, setting limits on exposure, and using collateral or netting agreements to mitigate potential losses.

Basel scope:

• Pillar 1
• Pillar 2

Capital requirements:

Mitigated by Capital

Related Links:

•       The Basel framework
•                 BCBS 424 - Basel III: Finalising post-crisis reforms
•                 Basel Framework
•                 BCBS 347 - Revisions to the Standardised Approach for credit risk