Featured Product

    BCBS Finalizes Revisions to Credit Valuation Adjustment Risk Framework

    July 08, 2020

    BCBS published the revised standard for regulatory capital treatment of credit valuation adjustment (CVA) risk for derivatives and securities financing transactions. The revisions to the regulatory capital treatment of CVA risk include re-calibrated risk-weights, different treatment of certain client cleared derivatives, and an overall re-calibration of the standardized and basic approach. These changes bring the revised CVA risk framework into alignment with the market risk framework. The revised standard comes into effect on January 01, 2023.

    The credit valuation adjustment (CVA) risk framework replaces an earlier version of the standard that was published in December 2017. This final standard incorporates changes proposed in the November 2019 consultative document and has been informed by a quantitative impact assessment based on data as of the end of June 2019. The following are the key highlights of the targeted revisions to the CVA framework: 

    • Reduced risk-weights. BCBS has agreed to adjust certain risk-weights in the CVA standardized approach (SA-CVA). All delta risk-weights in the interest rate risk class will be reduced by 30%, all delta risk-weights in the foreign-exchange risk class will be reduced by 50%, and the delta risk-weight in the counterparty credit spread and reference credit spread risk classes for high yield and non-rated sovereigns will be reduced from 3% to 2%. Moreover, the vega risk-weights in the SA-CVA will be capped at 100%. These amendments will align the CVA risk framework with the revised market risk framework. In addition, BCBS has also agreed that the risk-weight in the CVA basic approach (BA-CVA) for high-yield and non-rated sovereigns, including exposures to central banks and multilateral development banks, will be reduced from 3% to 2%.
    • Introduction of new index buckets and revised aggregation of CVA capital requirements. The revised market risk framework introduced new "index buckets," where banks could, under certain conditions, calculate capital requirements using credit and equity indices directly instead of looking through to the underlying constituents. BCBS has agreed to introduce the same new buckets in the counterparty credit spread risk class, reference credit spread risk class, and equity risk class of the SA-CVA. For credit and equity indices that satisfy the same liquidity and diversification conditions set out in the market risk framework, banks would have the option of calculating CVA risk capital requirements based on the index buckets rather than by looking through to the underlying constituents. BCBS has also agreed to revise the formula for aggregating capital requirements across buckets in the CVA risk framework to better align it to the market risk framework.
    • Alterations to the scope of CVA risk capital requirements. BCBS has agreed to adjust the scope of portfolios subject to CVA risk capital requirements by excluding some securities financing transactions where the CVA risks stemming from such positions are not material and exempting certain client-cleared derivatives. Moreover, the floor for the margin period of risk for some centrally-cleared client derivatives has been reduced. This brings the CVA requirement more in line with the counterparty credit risk framework and further incentivizes banks to centrally clear over-the-counter derivatives.
    • A revised overall calibration of the CVA risk framework. The revised CVA risk framework also includes a reduced value of the aggregate multiplier 𝑚CVA from 1.25 to 1 for banks using the SA-CVA. To have an appropriate relative calibration between the SA-CVA and the BA-CVA, BCBS has also agreed to introduce a similar scalar 𝐷𝑆BA-CVA = 0.65 for banks using the BA-CVA. This will result in a re-calibration of the capital requirements for CVA risk for banks using these approaches. 

     

    Related Links

    Effective Date: January 01, 2023

    Keywords: International, Banking, Basel, Regulatory Capital, CVA Risk, Market Risk, BA-CVA, SA-CVA, OTC Derivatives, Securities Financing Transactions, BCBS

    Featured Experts
    Related Articles
    News

    EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models

    The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.

    June 21, 2022 WebPage Regulatory News
    News

    EP Reaches Agreement on Corporate Sustainability Reporting Directive

    The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).

    June 21, 2022 WebPage Regulatory News
    News

    PRA Consults on Model Risk Management Principles for Banks

    The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.

    June 21, 2022 WebPage Regulatory News
    News

    EC Regulation Amends Standards for Calculating Credit Risk Adjustments

    The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.

    June 21, 2022 WebPage Regulatory News
    News

    BIS Hub Updates Work Program for 2022, Announces New Projects

    The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.

    June 17, 2022 WebPage Regulatory News
    News

    EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance

    The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.

    June 17, 2022 WebPage Regulatory News
    News

    US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule

    Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)

    June 16, 2022 WebPage Regulatory News
    News

    EIOPA Consults on Review of Securitization Framework in Solvency II

    The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.

    June 16, 2022 WebPage Regulatory News
    News

    BIS Bulletins Discuss DeFi Lending and Aspects of Crypto-Assets

    The Bank for International Settlements (BIS) published bulletins on lending in decentralized finance (DeFi) system, on blockchain scalability and fragmentation of crypto, and on extractable value and market manipulation in crypto and decentralized finance.

    June 16, 2022 WebPage Regulatory News
    News

    UK Authorities Issue Regulatory and Reporting Updates for Banks

    The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.

    June 15, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8292