- Highlights results reported by larger banks and potential implications going forward
London and New York (7th November 2011) - Quantifi, a leading provider of analytics, trading and risk management solutions to the global OTC markets, has published a short whitepaper entitled ‘CVA, DVA and Bank Earnings’ in response to recent bank earnings.
"While there are pros and cons to including DVA in earnings, most people see it as accounting gimmickry which doesn’t reflect any true economic value. Hopefully, this paper will shed some light on the issue."
David Kelly, Director of Credit Products at Quantifi
David Kelly, Director of Credit Products, Quantifi comments “debt value adjustment (DVA) has caused a lot of confusion because banks are allowed to record gains as their credit quality deteriorates. While there are pros and cons to including DVA in earnings, most people see it as accounting gimmickry which doesn’t reflect any true economic value. Hopefully, this paper will shed some light on the issue.”
The paper provides an overview of DVA and highlights some of the results reported by larger banks, along with potential implications going forward. The paper addresses the following:
- The meaning of DVA and how it relates to CVA
- Q3 DVA results for the five largest U.S banks, along with the increases in their respective CDS spreads that drove these gains
- The subsequent tightening of spreads during October and the estimated monthly DVA loss
- How much the DVA could move during Q4 due to movements in market factors other than credit spreads
- How some banks hedge DVA in order to reduce earnings volatility
Dmitry Pugachevsky, Director of Research, Quantifi, says “DVA is not only driven by the bank’s credit spread but also by the underlying market risk factors of the portfolio. The volatilities of the individual risk factors contribute substantially to the volatility of DVA. We expect more banks to look more closely at hedging DVA to mitigate earnings volatility.”
To request copies of this paper please visit Quantifi’s website or email for a copy.