The last decade witnessed a quantum jump in the derivatives activities of banks leading to a phenomenal rise in counterparty credit risk. One of the shortcomings of the prevailing Basel II framework is that it does not fully capture the unexpected rise in counterparty exposures under stressed conditions.
Besides, during the crisis we saw the financial condition of counterparties worsen at the same time when they suffered losses on their derivatives transactions, leading to the so called “wrong way risk”. The counterparty credit risk framework of Basel II is being revised to address these concerns. Capital adequacy framework: impact on Indian banks 10.