In December 2017, the Basel Committee of Banking Supervision (BCBS) published the regulatory framework “Basel III: Finalising post-crisis reforms” including new rules for the calculation of CVA risk capital, in an attempt to
- ensure that all important drivers of CVA risk, including CVA hedges, are covered in the Basel regulatory capital standard
- align the capital standard with the fair value measurement of CVA applied under various accounting regimes
- ensure consistency with the proposed revisions to the market risk framework under the Basel Committee's Fundamental Review of the Trading Book
This paper highlights the key differences between current and future calculation approaches for regulatory CVA risk capital charges. The Basel Committee proposes two new CVA risk capital frameworks, to acknowledge banks’ different capabilities regarding the computation of CVA sensitivities:
- the standardized approach (SA-CVA), which is based on CVA sensitivities
- the basic approach (BA-CVA), based on a formula similar to the current standardized method
In section II, we define different sample portfolios as well as a market data environment which we then use to calculate example CVA risk capital requirements for the different approaches. In section III, we present and discuss our calculation results. We conclude by summarizing and by recommending courses of action.