Contributor: Jean-Marc Schwob

Will economic capital and credit valuation adjustments cause credit limits to disappear? The recent emergence of credit control methodologies based on economic capital, such as credit value adjustments and credit VaR, have raised the interesting question as to whether credit limits should be considered an old-fashioned and crude way of controlling credit risk. Credit limits only control exposure but not risk. Credit exposure calculations usually ignore the counterparty dimension, and do not usually take into account wrong-way risk, default correlations, etc.... read more