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Are you Ready for the new CVA calculations under the new Basel 3.1/CRR III & CRD IV*?

The initial Basel III reforms in 2010 introduced a capital charge for Credit Valuation Adjustment (CVA) risk. The Basel 3.1/Basel IV* Reforms are enhancing the CVA Framework by: 

• Increasing risk-sensitivity by taking into account the exposure component of CVA risk along with its associated hedges;
• Strengthening its robustness by removing the use of an internally modelled approach (leaving a “standardised approach” and a “basic approach”); and,
• Improving its consistency by re-calibrating the remaining frameworks to be consistent with the approaches used in the revised market risk capital framework (Fundamental Review of the Trading Book (FRTB)).

The Credit Valuation Adjustment (CVA) is the incremental dollar exposure of a netting set to counterparty default.

Under the reforms, the allowable methodologies are as follows:

• The Standardised CVA Approach (SA-CVA) closely follows the sensitivity-based standard approach of the FRTB framework for market risk. Similarly, the SA-CVA requires internal modelling of sensitivities for given market risk factors and especially the counterparty credit spread. In that sense, the SA-CVA is de facto an internal model. Supervisory approval is required to use SA-CVA.
  
  
• The capital requirement (K) of the new Basic CVA Approach (BA-CVA-Full version) is comprised of a component for the counterparty credit spread risk (K_Spread) and a second component for the exposure risk (K_EE). Only single-name, single-name contingent and index CDS are allowed as hedges for counterparty credit spread component. Where supervisory approval has been received, a simpler approach for banks with smaller derivative portfolios may be acceptable (BA-CVA-Reduced version). 

Given all of the above, this is why some banks, for planning purposes, are already calculating the impact of CVA on capital.

Do you know your estimated delta of additional capital required by moving to the new CVA methodologies?

RiskTAE’s Basel 3.1/Basel IV/CRR III &CRD VI - ICAAP – Capital Adequacy Calculation Engine Model calculates CVA capital. It is a deployable Excel-based answer. It is a pre-built & ready to go Excel model solution for ICAAP for sale direct to banks, etc.

If you wish additional details or a walkthrough, please contact me.

In the next few articles, I’ll continue to discuss issues related to CVA in further detail.  

* Basel 3.1/Basel IV/CRR III & CRD VI/B3E/Finalised Basel III.

By: Mark Dougherty, Founder & Managing Director, RiskTAE (Risk Talent, Risk Advisory & Risk Education)

Email: mark.dougherty@risktae.com