by Quantifi and Kauri Solutions
co-authored by Jon Gregory, Solum Financial Partners
The global financial crisis brought counterparty credit risk and CVA very much into the spotlight. The Basel III proposals first published in December 2009 introduced changes to the Basel II rules and the need for a new capital charge 'CVA VaR' against the volatility of CVA. There are two ways for banks to compute CVA VaR, so-called standardised and advanced methods, which depend on their current regulatory approval with respect to other aspects. Furthermore, there is the potential to reduce the capital charges via eligible hedges. This whitepaper explores the capital charges under the two regimes and the capital relief that can be achieved.