A First View on the New CVA Risk Capital Charge
The impact of the new CVA risk regulation framework on calculation methods and the infrastructure of banks could potentially be the turning point for many of the medium-sized institutes we are seeing in the market.

In July 2015, the Basel Committee of Banking Supervision (BCBS) published a consultative paper on Credit Valuation Adjustment (CVA) risk to improve the current regulatory framework. In February 2016, first improvements of this framework have been introduced within the QIS instructions for the QIS based on December 2015 results. The consultative document presents a revision of the current framework addressing three major issues:

  • Ensure that all important drivers of CVA risk and CVA hedges are covered in the Basel regulatory capital standard
  • Align the capital standard with the fair value measurement of CVA employed under various accounting regimes
  • Ensure consistency with the proposed revisions to the market risk framework under the Basel Committee’s Fundamental Review of the Trading Book

This paper highlights the key differences of current and future calculation approaches for regulatory CVA risk capital charges, including the eligibility criteria for using the different approaches. The BCBS consultative paper proposes two frameworks to accommodate different types of banks with respect to the ability to calculate CVA sensitivities:

  • The “FRTB-CVA framework” consisting of the standardized approach (SA-CVA) based on CVA sensitivities
  • The “Basic CVA framework“ (BA-CVA), based on a formula similar to the current standardized method

In section two we outline different sample portfolios and a market data environment to calculate exemplary results for the different approaches. In section three, the calculation results are presented and the most relevant input factors are described. The conclusion includes results and recommended future action items for both banks and regulators.

Our sample calculations show the potential impact of the new approaches that have been presented in the consultative paper. The most important result is the increase of the CVA risk capital charge under the new basic approach (BA-SVA) compared to the current standardized approach. In addition, our samples show the benefit of the new SA-CVA for the collateralized portfolios.

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