In a discussion paper dated April 2010,  the FSA analysed the losses related to different types of assets and concluded that two-thirds of counterparty credit risk losses were attributable to Credit Valuation Adjustment (“CVA”) and only about one-third were due to actual counterparty defaults.

The CVA capital requirements introduced by Basel 3 (and its European version, the proposed CRD 4) seek to ensure that credit institutions hold capital to mitigate the credit risk losses attributable to CVA.

There are two methodologies for calculating the capital requirements for CVA, the Advanced Method and the Standardised Method.

In this practice note, we explain what CVA is, how it is measured under the Standardised Method and the key drivers that impact the amount of regulatory capital required for CVA.

For a copy of the practice note download here