Elderlake Partners

05 · BA-CVA — the workhorse

Art 384 CRR

Purpose & history

A closed-form portfolio model

The BA-CVA is what remains when supervisors want CVA capital without CVA models: a closed-form approximation of a one-factor spread portfolio. Each counterparty gets a standalone charge (SCVA) proportional to risk weight × maturity × exposure; the aggregation then splits the book into a systematic component (spreads move together, ρ = 50% — hedgeable with indices) and an idiosyncratic component (they don't — hedgeable only name-by-name). Every design choice follows: single-name CDS reduce the name's own term with an rhc discount for basis; index CDS reduce only the systematic term; the HMA penalises hedges booked against the wrong name; and β = 25% floors the whole exercise because a supervisor who abolished CVA models does not then fully trust CVA hedge accounting either. The DS = 0.65 scalar is simply the 2020 recalibration admitting the 2017 numbers were too high.

Requirements

Inputs per netting setSA-CCR EAD, effective maturity M (capped/floored per rules), discount factor — reconciled quarterly to the CCR engine.
Counterparty mappingSector and credit-quality classification to the RW table; unrated → HY/NR column, with the mapping governed, not improvised.
Hedge designationCVA hedges identified at booking, rhc evidenced (entity relationship), carved out of the market-risk engines to prevent double counting.
Reduced vs full choiceBanks without hedges may run reduced-only; electing the full version is a method decision with governance, not a spreadsheet toggle.

Calculations

Two counterparties — diversification inside the formula SCVA₁ = €2.59m · SCVA₂ = €1.00m
K_red = √((0.5×3.59)² + 0.75×(2.59²+1.00²))
= √(3.22 + 5.78) = €3.00m vs €3.59m summed — the (1−ρ²) term grants 16% idiosyncratic diversification, automatically.
Index hedge — systematic only €30m iTraxx-based hedge reduces the ρ·ΣSCVA term via IH; it cannot touch the 0.75·ΣSCVA² leg — a book of few, lumpy counterparties is structurally under-hedgeable with indices. Portfolio shape decides hedge strategy.
The full chain, hedged (from the section detail) SCVA = €2.59m · SNH = €1.81m → K_hedged = €0.78m
K = 0.65 × (0.25×2.59 + 0.75×0.78) = €0.80m vs €1.68m unhedged; floor at 0.65×0.25×2.59 = €0.42m.
Maturity is the lever Same trade at M = 1y: DF = 0.975 → SCVA = (1/1.4)×5%×1×20×0.975 = €0.70m — a quarter of the 4y charge. Trade compression and break clauses are CVA-capital tools before any CDS is bought.

Changes & sources

Old (CRR2 Art 384)BA-CVA
Standardised CVA: bond-equivalent VaR formulaPortfolio-consistent SCVA aggregation, explicit hedge terms
Hedges crudely recognisedrhc ladder, index recognition, HMA, β floor
  • Sources: Art 384; Basel MAR50. Watch the exemption review — scope, not calibration, is where EU CVA capital really moves.

Independent analysis by Elderlake Partners, as at August 2026. Not legal, accounting or supervisory advice.