How the Trading Floor Really Works

Credit Risk Limits

While market risk limits are trading book specific, credit risk limits are client specific. These are determined by the credit risk limit team within risk management. There are a number of approaches to credit limits, but, very generally, the approach is to set general guidelines bank wide for different ratings, different jurisdictions and different industries. These limits will apply to all credit risk that the bank has to a client. This includes any lending the bank does as well as any derivatives and any credit trades on that client as issuer (e.g. bonds issued by that client or credit default swaps on that client) (Box 14.3).

Box 14.3 Supermart credit risk limits at Megabank

• Supermart Credit Limit: $1 billion
• $600 ...