What is CVA capital?
What is CVA capital?
CVA is an adjustment to the fair value (or price) of derivative instruments to account for counterparty credit risk (CCR). Thus, CVA is commonly viewed as the price of CCR. The purpose of the Basel III CVA capital charge is to capitalise the risk of future changes in CVA.
What is the minimum capital requirement under Basel II?
Under Basel II, banks are required to maintain a total capital ratio (Tier 1 + 2 + 3) of minimum 8%.
Which three approaches can be used to calculate the capital for credit risk exposure?
There are three approaches available for calculating CVA risk: (1) the standardised approach (SA-CVA), which is an adaptation of the SA for market risk and requires supervisory approval; (2) the simpler basic approach (BA-CVA); and (3) an approach for banks with less engagement in derivatives activities in which they …
How is CVA RWA calculated?
The risk-weighted assets (RWA) for credit valuation adjustment (CVA) risk are determined by multiplying the capital requirements calculated as set out in this chapter by 12.5. Multiplying the CVA volatility charge by 12.5 to get an RWA equivalent would then not involve the 1.06 scalar.
What is CVA and how is it calculated?
Formula for Calculating Credit Valuation Adjustment T = Maturity period of the longest transaction. Bt = Future value of one unit of the base currency invested at the current interest rate at T maturity. R = Fraction of the portfolio value that can be removed in case of default. T = Time of default.
How is counterparty credit risk calculated in Basel III?
Banks are free to choose their approach, though all banks must calculate the capital requirement under the reduced version of the BA-CVA. This is based on the individual CVA capital requirements computed for each counterparty and a supervisory correlation parameter for credit spreads of any two counterparties.
How is CCR treated in the Basel III framework?
CCR is a complex risk to assess. It is a hybrid between credit and market risk and depends on both changes in the creditworthiness of the counterparty and movements in underlying market risk factors. This Executive Summary provides an overview of the treatment of CCR in the Basel III framework.
What does DVA stand for in counterparty credit risk?
Definition (DVA) Price pA as seen from counterparty A with counterparty B: p∗ = p − CVAB + DVAA p : risk-free price DVAA : Debit Valuation Adjustment for counterparty A DVA increases the price. Accounting vs. Regulatory DVA must be used for P&L but not for regulatory capital. c 2015 H¨aner Consulting CCR&CVA under Basel III 31 / 205
How is the capital requirement for a CVA calculated?
The capital requirement for the entire CVA portfolio, including all eligible hedges, is calculated as the sum of the capital requirements for individual risks, ie delta and vega risk, increased by a minimum supervisory multiplier of 1.25 to compensate for a higher level of model risk compared with the market risk standard.