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A percentage of the notional value of a loan, a security, an OTC derivative contract, or some other position charged to a financial institution's regulatory capital. The procedure called for under the Basle Accord is to multiply the notional value of the contract by a factor for interest rate contracts with a remaining life of more than one year and add that amount to the current credit exposure. The add-ons for foreign exchange contracts, equities and commodities are much larger than the add-ons for interest rate contracts. The Basle procedures are a very crude approximation of potential credit exposure. Many sophisticated risk management systems use considerably more complex methods to estimate potential credit exposure. A popular approach in these systems is to measure credit exposure two or three standard deviation intervals away from the mean interest rate or currency exchange rate. See also Basle Convergence Agreement, Value At Risk (VAR) (2).
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