Counterparty Risk

Inputs

Type 1 Default RiskSolvency capital required for counterparty default risk on Type 1 exposures under Article 200.

€

Type 2 Default RiskSolvency capital required for counterparty default risk on Type 2 exposures under Article 202.

€

Standalone Counterparty Risk

€110

Before diversification

−

Diversification Benefit

€6

−5.6% of standalone

Capital relief

=

Counterparty Risk SCR

€104

After diversification

Step	Delta	Running
Type 1 Default Risk	75	75
Type 2 Default Risk	35	110
Standalone Counterparty Risk	110	110
Diversification Benefit	-6.137109610795065	103.86289038920494
Counterparty Risk SCR	103.86289038920494	103.86289038920494

Counterparty exposure mix

Module	Share	Amount
Type 1 Default Risk	68.2%	€75
Type 2 Default Risk	31.8%	€35

Counterparty aggregation matrix (equivalent)

1.000.75

Counterparty aggregation matrix (equivalent)
	T1Type 1	T2Type 2
T1Type 1	1.00	0.75
T2Type 2	0.75	1.00

1Step 1

Counterparty Risk SCR

\textit{Counterparty Risk SCR} = \sqrt{SCR_{def,1}^2 + 1.5 \times SCR_{def,1} \times SCR_{def,2} + SCR_{def,2}^2}

2Step 2

Diversification Benefit

\textit{Diversification Benefit} = \max\left(0, \textit{Type 1 Default Risk} + \textit{Type 2 Default Risk} - \textit{Counterparty Risk SCR}\right)

3Step 3

Standalone Counterparty Risk

\textit{Standalone Counterparty Risk} = \textit{Counterparty Risk SCR} + \textit{Diversification Benefit}

Understand the Counterparty Risk

What this calculator does

This calculator implements the Counterparty Default Risk module within the standard formula. It combines the Type 1 and Type 2 default-risk streams into the diversified counterparty term used in BSCR^[1]^[2].

Input terms

Type 1 Default Risk: The charge for rated and capital-markets-style counterparties such as reinsurers, derivatives counterparties, and similar financial exposures, built from loss-given-default and the regulatory default-distribution mechanics^[3]^[4].
Type 2 Default Risk: The charge for simpler unrated receivables-style exposures, where the standard formula applies prescribed factors based on whether balances are overdue^[5].

Calculation

The standard formula splits counterparties into two types because the information available is fundamentally different. Type 1 exposures are modeled through a probability-weighted loss distribution that depends on exposure quality and concentration, while Type 2 exposures receive the simpler flat-factor treatment because little credit-quality information is normally available^[3]^[4]^[5]. The two streams are then combined under the counterparty-default framework to produce the diversified module result used in BSCR^[1].

Important notes

Group concentration matters.: Where multiple Type 1 exposures sit within the same group structure, the standard formula can offer little or no effective diversification across those names^[4]^[6].
Unrated material counterparties are treated conservatively,: which makes credit classification and exposure hygiene especially important for the module result^[6]^[5].
Collateral can reduce LGD,: but only where it meets the regulatory eligibility expectations and can really be relied on in a counterparty stress^[6].
Spread widening is not the same as default risk.: Market-value deterioration of bonds is captured in spread risk, while this module is about non-payment risk itself^[7]^[1].
Reporting: The counterparty-risk result is intended to reconcile to the counterparty-default part of the Solvency II QRT package, including the S.26 family of views^[8].

Sources