Counterparty risk: Portfolios must not become outdated

This was noted by the MaRisk Expert Committee on 2 September 2021, which also outlined possible scenarios: either the institution makes reinvestment assumptions, or it assumes default and migration immediately after the calculation reference date.¹ Those who switch to this t0 assumption will observe that the quantile values rise, particularly for positions with a short remaining maturity.

The economic perspective is the yardstick

As both the economic and the normative perspective have been required in risk-bearing capacity since 2023, a consistency requirement also arises for counterparty risk: if the risk coverage potential is determined on an economic basis, the risks involving economic losses must also be quantified, either at present value or close to present value. This also brings into focus the treatment of positions that mature within the risk horizon.

The ‘ageing’ of the portfolio increases the risk

At the heart of these expectations lies the treatment of positions that mature within the risk assessment horizon. In the supervisory authority’s view, the ‘ageing’ of the portfolio – a factor very often assumed in banking practice – is a strong indicator of risk and runs counter to the going-concern assumption and rolling risk assessment.

A position maturing in the third month carries hardly any risk in an ageing portfolio, even though the bank will renew the transaction. It is the maturity structure as at the reporting date that is measured, not the business model.

The regulatory ‘either/or’

The supervisory authority considers it necessary to make reinvestment assumptions for positions maturing during the year. These assumptions may only be dispensed with under one condition: if the occurrence of potential default and migration events is assumed to take place immediately after the calculation reference date and is applied to the portfolio as at that reference date. Otherwise, appropriate assumptions must be made which are consistent with the business strategy and adequately reflect the maturity structure.

The asymmetry in risk coverage potential

It is worth noting that the regulator treats both sides of the equation differently. When determining risk-covering potential, reinvestment may be disregarded, even if this results in an inconsistency with the risk side. Conversely, notionally rolled-over positions may only be taken into account there if all resulting costs and material risks are adequately reflected. The supervisory authority expressly doubts that this can be achieved in practice. The asymmetry is not an oversight, but a precaution:

Why the t0 assumption is the simpler approach

Firstly, the forecast is no longer required. Anyone carrying out a hypothetical reinvestment must make assumptions about future business, align these with the business strategy and document them. The t0 assumption does not require this additional framework, as it bases its calculations on the existing portfolio.

Added to this is the reduced scope for discretion. Whether a maturity structure is ‘sufficiently well’ represented is a matter for discussion in an audit. The t0 assumption shifts the burden of justification to the core calculations and reduces the documentation requirements.

Finally, the key figure gains in selectivity because, without the time effect, credit quality, concentration and parameterisation determine the result.

Counterparty risk ICAAP: Which key figures are changing?

The switch to the t0 assumption alters three control variables. Prior to the event, no further payments are made to mitigate the loss. Furthermore, the valuation is based on the full remaining term from the reference date, rather than the remaining term at the risk horizon, which has been shortened by one year. Finally, discounting is carried out using the risk-free yield curve as at the reference date rather than forward interest rates. The only offsetting effect is the reduction in migration risk by the amount of the loss that did not materialise.

This has the most significant impact on short-term transactions, rolling positions and structures involving two debtors – such as the issuer and the counterparty – where a deferred default previously had a mitigating effect.

With the Release R5.94 of Sparkassen-CreditPortfolioView, a further large user group will switch to the t0 view in the fourth quarter of 2026. The impact analyses for this show the expected pattern. In the customer lending business, the quantile value and Value-at-Risk remain virtually unchanged. In Portfolio A, however, the expected value and quantile value rise significantly, with considerable variation between portfolios.

Anyone operating their own methodology must choose one of the two approaches and justify their choice. With R5.94, Sparkassen’s CPV relieves users of this choice. Three questions remain unanswered: To what extent do the key figures in one’s own portfolio shift, as measured against a comparative calculation? Can the limit structure accommodate this shift, or do limits and risk coverage need to be rebalanced? And is the previous practice of rolling over maturing positions still necessary alongside the t0 assumption?

Summary

The supervisory expectations regarding the counterparty risk ICAAP have been in place since 2021. Those switching to the t0 assumption can do so without the need for notional reinvestment, but must expect shifts in key figures. The issue, therefore, is less the method itself and more its impact on risk-bearing capacity, limits and documentation.

We would be happy to discuss with you how robust your current setup is and where adjustments may be needed. Savings banks can use our Quick-Check CPV for this purpose, which covers the entire CPV process and is particularly well-suited to the release changeover. On request, we can also provide support with the changeover itself and the validation process.