Credit Value Adjustment

The new Credit Value Adjustment (CVA) risk framework methodologies for calculating capital requirements will comprise of the Alternative Approach, the Basis Approach and the Standardised Approach.

The new CVA framework aims to improve the risk sensitivity and comparability of CVA capital requirements. It attempts to achieve the following:

  • More comprehensive treatment of CVA risks and better recognition of CVA hedges
  • Closer alignment with industry CVA practices for accounting purposes
  • New methodologies which have less reliance on modelling.
  • Alignment with the new market risk framework methodology in the case of the most advanced method

Exposures to sovereigns and non-financial counterparties are no longer exempt from CVA capital requirements, which could lead to an increase in CVA capital requirements for some firms.

There are a number of exemptions under the current rules for the SA-CCR regime. A number of these are changing under the final rules:

Exposure/Counterparty Type

Exemptions

Sovereigns and NCFsRemove existing exemption from CVA requirements
Pension FundsRemove current exemption from CVA capital requirements AND introduce new RW under BA-CVA and new credit spread delta in SA-CVA
Intragroup ExemptionRetained existing exemptions and included more flexible ways to apply these.
Client Clearing transactionsRetain exemptions from CVA capital requirements for client clearing transactions.

Regulatory permission is required to apply for SA-CVA. Many banks are targeting SA approval due to the expectation that the capital requirements will be lower. This approach is also expected to provide better alignment with Accounting CVA.

What banks should consider

For firms seeking the Standardised Approach CVA, they should prepare to apply for supervisory approval in a timely manner, as delays in application will impact the PRA’s turnaround time as we get closer to the implementation date.

Get in touch

If you have any further questions regarding Basel 3.1, please contact us via the button below and a member of our team will be in touch.

Contact us today

Want to know more?