21 August 2012
Since the start of the financial crisis, extreme market turbulence and increased regulatory scrutiny have brought counterparty credit risk management to the top of the banking agenda. The collapse of Lehman Brothers has led to a deterioration in confidence that financial institutions are capable of fulfilling their obligations to their counterparties. The continuing troubles in the Eurozone, combined with the widespread downgrading of Sovereign debt, have resulted in a loss of faith in the ability of nation states to fulfil their obligations.
Banks subsequently have been developing sophisticated methodologies to cope with the increase in counterparty risk. The credit valuation adjustment (CVA) is a calculation central to good counterparty credit risk management. CVA represents the price assigned to trades to take into account the possibility of a counterparty defaulting.
The Bank of International Settlements estimated that nearly two thirds of the losses from the financial crisis of 2008 were in fact the result of CVA volatility as opposed to actual defaults, which highlights the importance of CVA to the integrity of the banking system.
The specialised CVA trader has risen to prominence in recent years and many banks now have their own CVA desks. However, IT infrastructure limitations and a vast array of complex modelling techniques means that CVA is an area with which many banks still struggle. And with Basel III set to require banks to hold capital against CVA volatility, these fiendishly difficult calculations will become even more important to financial institutions. Seguir leyendo
