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15.05.2025
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Deutsche Bundesbank 

Risk of a credit valuation adjustment (CVA)

Introduction and background The CVA framework covers OTC derivatives and, if deemed material, securities financing transactions as well. These harbour not only market risk, but also credit risk: A deterioration in the credit quality of the counterparty in a transaction has a negative effect on the value of the transaction. The higher the potential exposure to the counterparty, the greater the resulting absolute loss in value. The described relationship between market risk and credit risk can ...
Introduction and background The CVA framework covers OTC derivatives and, if deemed material, securities financing transactions as well. These harbour not only market risk, but also credit risk: A deterioration in the credit quality of the counterparty in a transaction has a negative effect on the value of the transaction. The higher the potential exposure to the counterparty, the greater the resulting absolute loss in value. The described relationship between market risk and credit risk can be measured by looking at the difference in value between a credit-risk-free portfolio and an identical portfolio that takes into account creditworthiness, that could potentially change. This difference in value is termed the credit valuation adjustment (CVA). Credit institutions are required to measure the risk of a change in CVA values (CVA risk). As described, a change in CVA values may be caused by a change in the credit quality of the counterparty (credit risk), by a change in the absolute value of the transaction (market risk), or by a combination of both. Own Funds Requirements During the financial crisis, banks incurred significant CVA losses, which led to the decision to include a capital requirement for CVA in the Basel III framework and the CRR. Institutions can generally use the CVA basic approach (BA-CVA) to determine own funds requirements. The calculation is performed using a predefined formula based on certain characteristics of the relevant transactions (e.g. maturity,...

Errors and omissions excepted. As of: 15.05.2025