James Babicz at SAS UK & Ireland says that, while most banks are currently not capable of effective CVA calculations, those that are will benefit as a result.
Since the start of the financial crisis, extreme market
turbulence and increased regulatory scrutiny have brought
counterparty credit risk management to the top of the banking
agenda. The collapse of Lehman Brothers has led to a
deterioration in confidence that financial institutions are
capable of fulfilling their obligations to their
counterparties. The continuing troubles in the Eurozone,
combined with the widespread downgrading of Sovereign debt,
have resulted in a loss of faith in the ability of nation
states to fulfil their obligations.
Banks subsequently have been developing sophisticated
methodologies to cope with the increase in counterparty risk.
The credit valuation adjustment (CVA) is a calculation central
to good counterparty credit risk management. CVA represents the
price assigned to trades to take into account the possibility
of a counterparty defaulting.
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