In addition to raising the quality and level of the capital base, the Basel III framework recognized the need to ensure that all material risks are captured in the capital framework. Failure to capture major on- and off-balance sheet risks, as well as derivative related exposures, was a key factor that amplified the crisis. This section outlines enhancement to Risk Coverage under the Basel III framework as given below.
| | A. | Counterparty Credit Risk
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| | | • | Revised metric to better address counterparty credit risk, credit valuation adjustments and wrong-way risks
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| | | • | Introduction of Asset Value correlation (AVC) for Financial Institutions
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| | | • | Collateralized counterparties and increased margin period of risk
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| | | • | Central Counterparties (CCPs)
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| | | • | Enhanced counterparty credit risk management requirements
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| | B. | Addressing Reliance on external credit ratings and minimizing cliff effects
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| | | • | Standardized Inferred rating treatment for long-term exposure
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| | | • | Incentive to avoid getting exposures rated
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| | | • | Incorporation of IOSCO’s Code of Conduct Fundamentals for Credit Rating Agencies
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| | | • | ‘’Cliff effects’’ arising from guarantees and credit derivatives- ‘’CRM’’
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| | | • | Unsolicited ratings and recognition of ECAI’s
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