TCH Publishes Research Note on the Methodology Used to Calibrate the Single-Counterparty Credit Limit

TCH Publishes Research Note on the Methodology Used to Calibrate the Single-Counterparty Credit Limit

The Clearing House (TCH) Research Department has published a note on the methodology used to calibrate the single-counterparty credit limits (“SCCL”) for domestic and foreign bank holding companies (BHCs) with total consolidated assets of $50 billion or more. This research note provides an overview and assesses the efficacy of the methodology used to determine the stringency and composition of the SCCL for U.S. globally systemically important bank holding companies (GSIBs), which are subject to the most stringent SCCL. The research note identifies two key shortcomings: (i) the methodology lacks an empirical basis for half of the parameters of the credit risk model used to calibrate the SCCL, implying that the proposed more stringent 15 percent limit for inter-GSIB exposures is not appropriately calibrated; and (ii) in order to achieve conceptual and intellectual consistency across the single-counterparty credit limit and GSIB surcharge frameworks, either the inter-GSIB credit limit would have to be increased substantially or the GSIB surcharges would have to be cut roughly in half for the majority of U.S. GSIBs.

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The views expressed do not necessarily reflect those of the Bank Policy Institute’s member banks, and are not intended to be, and should not be construed as, legal advice of any kind.