Revised CVA capital charge continues to worry dealers
Original headline: CVA melee
Finalised by the Basel Committee in December, a capital charge for credit value adjustment (CVA) will have a significant impact on major derivatives dealers. But risk managers argue the revised charge is not risk-sensitive enough and fails to reflect the diversity of approaches to CVA. Mark Pengelly reports
Bankers breathed a sigh of relief in December, when the publication of the final text of Basel III confirmed what many already suspected – the Basel Committee on Banking Supervision had accepted its original proposals for a credit value adjustment (CVA) capital charge were too onerous and had decided to make significant changes. The revised measures have been welcomed as a vast improvement that better reflect bank CVA exposures. But many participants remain uneasy, and claim further changes are needed – particularly around the use of own models and sensitivity of CVA to market factors.
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The CVA capital charge forms part of a package of measures on counterparty credit risk within Basel III. While other parts of the framework – specifically, the increase in minimum capital requirements, new counter-cyclical buffer and liquidity ratios – may have the broadest implications, the counterparty credit risk rules could end up having the biggest impact on over-the-counter derivatives dealers.
“There are parts of the rules, especially relating to the capital definitions and what qualifies as Tier I common equity, that really do have broad implications. But if you look at what is going to affect the business strategy, I would argue the implications for counterparty exposure are very significant,” says Alok Sinha, San Francisco-based