tracker

The Prudent Valuation of Financial Instruments

For the determination of tier one capital, the Capital Requirements Regulation  (CRR) imposes the principle of prudence upon the pricing of financial instruments recognized at fair value. The prudent value of a position is obtained from its fair value by subtracting several risk and cost factors which are not fully accounted for in its balance sheet value.

 

In the final draft concerning these Additional Valuation Adjustments (AVAs) from March 21st, 2014, the EBA specified the prudent valuation according to articles 34 and 105 of the CRR. The CRR is interpreted as requiring the application of the prudent valuation measures to all fair value positions, including liabilities. AVAs are to be quantified such that upon exiting a position at least the prudent value can be realized with a probability of 90%. A de minimis limit is not applicable, however EBA specified a simplified approach to the computation of AVAs for institutions running smaller fair-value books.

 

We have discussed fundamental questions about the prudent valuation requirements, giving special consideration to dependencies between valuation, accounting, and capital requirements. In a whitepaper on prudent valuation we provide an overview of the current status of the regulatory publications relating to the topic and give a summary of our insights and experiences gained in projects and discussions with customers.

How we can support you

At d-fine we have profound expertise and hands-on experience from numerous projects in the new regulatory context.

Use our market overview regarding prudent valuation to

  • Benefit from our experience of numerous projects ranging from first drafts to final implementations,
  • Discuss the current state of the discourse between regulator and market participants as well as the progress of the implementation of the new framework in the banking sector
  • Classify your requirements in the context of the new regulations and clarify their impact on your business model,
  • Use our whole network of experts to select appropriate measurement procedures, as well as for the design, implementation and maintenance of the necessary processes,
  • Quantify the valuation adjustments. Benefit from our experience regarding all aspects of the valuation and the risk management of financial products

 

We would be pleased to arrange a meeting with your in-house experts and discuss this important topic. We look forward to hearing from you!

To receive detailed information on our approach and references in the area of prudent valuation call us on +49 69 907370 or email us at info@remove-this.d-fine.de, with the subject line "Prudent Valuation".