LONDON: Global banking regulators have proposed a more comprehensive set of rules for banks to set aside capital to cover losses from their exposures to other lenders and limit fallout in a crisis.

During the financial crisis some banks suffered big losses on their derivatives contracts due to weaker creditworthiness at banks on the other side of their trades.

The value of derivatives had to be written down when it became obvious that counterparties may not meet their obligations.

Since then capital requirements to cover such “credit valuation adjustments” (CVA) have been beefed up but the Basel Committee of banking supervisors wants to extend them to “reduce the incentive banks currently have to leave some of their risks unhedged”.

Published in Dawn, July 2nd, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play