How is CVA RWA calculated?

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 a capital charge in Basel?

In banking parlance ‘Capital charge’ refers to capital requirement (also known as regulatory capital or capital adequacy). Indian banks as per RBI direction are required to maintain 5.5 per cent Common Equity Tier 1 (CET 1) as against 4.5 per cent required under the Basel III framework.

What is a credit valuation adjustment CVA and how is it used to address risk?

Credit valuation adjustment is a change to the market value of derivative instruments to account for counterparty credit risk. It represents the discount to the standard derivative value that a buyer would offer after taking into account the possibility of a counterparty’s default.

What is CVA capital charge?

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 CVA charge?

The “CVA charge”. The hedging of the CVA desk has a cost associated to it, i.e. the bank has to buy the hedging instrument. This cost is then allocated to each business line of an investment bank (usually as a contra revenue). This allocated cost is called the “CVA Charge”.

What is the minimum capital requirement under Basel III?

Under Basel III, the minimum capital adequacy ratio that banks must maintain is 8%. 1 The capital adequacy ratio measures a bank’s capital in relation to its risk-weighted assets.

What are CVA charges?

How is capital charge calculated?

The capital charge depends on the return that investors expect on each class of capital. It is found by multiplying a project’s invested capital by a percentage. This percentage is a weighted average of the investors’ expectations. Before calculating the capital charge, an analyst must determine both of these numbers.

Can you have a negative CVA?

The incremental CVA can never be lower (more negative) than the stand-alone CVA. The incremental CVA is only slightly reduced for a very similar existing trade (5-year IRS payer). This indicates a high positive correlation between the two trades.

What is BA CVA and SA CVA?

The BA-CVA only encompasses the recognition of hedges pertaining to the counterparty credit risk component. It does not recognise exposure associated hedges. The SA-CVA is a model based approach for exposure calculation and, therefore, is more akin to the existing Advanced Method.

What are bank capital requirements?

Capital requirements are regulatory standards for banks that determine how much liquid capital (easily sold assets) they must keep on hand, concerning their overall holdings. Express as a ratio the capital requirements are based on the weighted risk of the banks’ different assets.

How is the CVA risk capital charge calculated?

The current CVA framework sets forth two approaches for calculating the CVA capital charge, namely the “Advanced CVA risk capital charge” method (the current Advanced Approach) and the “Standardised CVA risk capital charge” method (the current Standardised Approach).

How are capital requirements calculated under the reduced version of Ba-CVA?

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.

What is the risk of counterparty default under Basel III?

The risk of counterparty default was already covered in Basel I and Basel II. The Basel III reforms introduced a new capital charge for the risk of loss due to the deterioration in the creditworthiness of the counterparty to a derivatives transaction or an SFT. This potential mark-to-market loss is known as CVA risk.

How is CCR treated in the Basel III framework?

This Executive Summary provides an overview of the treatment of CCR in the Basel III framework. The risk-based capital charges for CCR in Basel III cover two important characteristics of CCR: the risk of counterparty default and a credit valuation adjustment (CVA). The risk of counterparty default was already covered in Basel I and Basel II.