InteDelta InSight on Specific Wrong-way Risk
InteDelta InSight provides expert commentary on some of the most pressing risk management topics faced by our clients. In each edition, we consider the latest market developments; what the impact of these developments will be for market participants; and how the industry is reacting to the challenges involved. This edition considers how processes for managing specific wrong-way risk are evolving within banks, in the light of increased regulatory focus.
Key point summary:
- Basel III mandates significantly greater rigour in the management of specific wrong-way risk (SWWR) than has historically been in place within financial institutions;
- A level of ambiguity still exists surrounding the definition of SWWR in regulatory rulemaking;
- From discussions with regulators, many leading banks are now taking the view that the Basel III reference to ‘highly correlated’ has a broader implication than simply legally connected;
- Such banks are putting in place new governance structures, processes and systems capabilities in order to reflect this expanded SWWR definition, and to ensure SWWR is managed in a robust, transparent and controlled way.