Prudent Valuation (AVAs) in COVID-19 crisis


Since inception, the pro-cyclical nature of AVAs was pointed out by practitioners: In particular, in times of severe market stress, the 90%-quantile of exit prices is structurally different from the 90%-quantile as estimated under normal market conditions. As a result, in times of market stress as today due to COVID-19, the AVAs do not dampen capital effects due to fair valuation, but risk to propagate market exaggerations and distortions directly into CET1. The capital needed for supporting credit business in particular (and therefore being protected by current regulatory ad-hoc measures) will be hit.

It is time to take measures.