Calculating CVA capital charges is likely to prove highly complex for banks and will have a significant impact on their P&L, writes Galen Stops
The amount of capital that banks should be forced to hold in
reserve is an issue that has increasingly been in the
spotlight, with regulators imposing greater capital
requirements at a time when capital is scarce. How banks
respond to these requirements will have a big impact on their
profit sheets and are highly likely to alter their trading
"What happened was that during the crisis this capital
allocation which banks are supposed to hold didn't really
happen. Why? Because there weren't many loses for defaults,
relatively speaking," says Dr Dmitry Pugachevsky, director of
research at Quantifi.
Indeed, it is often said that only about one-third of losses
during the financial crisis were caused by defaults while the
other two-thirds was a result of Credit Value Adjustment (CVA)
As a result regulators are introducing a series of new
capital requirements for banks aimed at creating an effective
buffer against future losses. But what difference will the new
requirements make to banks and how they operate?
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