05 · CVA risk

Art 381–386 CRR

Purpose & history

The loss nobody capitalised

Going into 2008, counterparty risk meant default risk. But a derivative claim on a weakening counterparty loses value long before any default: the credit valuation adjustment marks that expected-loss component to market, and in 2008–09 those marks moved violently. Supervisory post-mortems put roughly two-thirds of counterparty credit losses in the crisis on CVA mark-downs, only a third on actual defaults — and the framework charged capital exclusively for the third.

CVA mark-to-market

≈ ⅔ of losses

uncapitalised pre-2010

Actual defaults

≈ ⅓

the only charged part

Composition of 2008–09 counterparty credit losses per BCBS post-crisis analysis — the empirical case for the CVA charge.

The EU's standing deviation

The CRR has exempted corporates, sovereigns, pension funds and intragroup counterparties from the charge since 2013 — an EMIR-aligned concession to end-user hedging that Basel never contained. CRR3 keeps the exemptions but makes them visible: exempted exposures must now be calculated and reported anyway. The Commission owes a review; the exemptions are the part most likely to move.

The lineage

2008–09

CVA marks, not defaults, drive counterparty losses.

2010

Basel III adds the CVA charge — VaR-based, internal models allowed.

2013

CRR carves out the EU exemptions (corporates, sovereigns, pension funds).

2017

Finalisation removes internal-model CVA: the risk is deemed too dependent on unobservable spreads to model for capital. SA-CVA / BA-CVA architecture set.

2020

Targeted revisions recalibrate: DS = 0.65, m_CVA = 1.0, index-hedge recognition widened.

2025

CRR3 applies the new framework; exemptions stay, reporting of exempted trades begins.

Requirements

What the charge demands operationally

Scope engineEvery derivative and SFT counterparty classified: in charge, or exempt under Art 382 — with the exempted population now computed and reported as if charged.

BA-CVA dataPer netting set: SA-CCR EAD, effective maturity, counterparty sector and rating mapped to the RW table. Nothing exotic — but sourced quarterly, reconciled to the CCR engine.

Hedge documentationSingle-name and index CDS designated as CVA hedges, eligibility evidenced (reference entity relationship → r_hc), and carved out of market risk to avoid double counting.

SA-CVA approvalA regulatory CVA model: exposure simulation, spread curves (with a defensible proxy-spread methodology for illiquid names), sensitivity production, independent validation, and an active CVA desk — approval is granted per portfolio and withdrawn per failure.

GovernanceCVA risk appetite, limits on the charge's drivers, and a management loop between the CVA desk's hedging and the capital figure it produces.

Calculations

Reduced BA-CVA — one counterparty, unhedged EAD = €20m (SA-CCR) · M = 4y · IG financial → RW_c = 5.0%
DF = (1−e^(−0.2))/0.2 = 0.906
SCVA = (1/1.4) × 5.0% × 4 × 20 × 0.906 = €2.59m
One counterparty → K_red = SCVA = €2.59m
K = 0.65 × 2.59 = €1.68m own funds (RWA-eq. ≈ €21m)

Simplified approach Small bank within Art 385 thresholds: CVA own funds = 100% of the CCR requirement — one number, no separate engine.

The same counterparty, hedged

Add a 4y single-name CDS on the counterparty, notional €10m, r_hc = 100%.

SNH = 1.00 × 5.0% × 4 × 10 × 0.906 = €1.81m
K_hedged = |SCVA − SNH| = 2.59 − 1.81 = €0.78m (HMA = 0 at r = 100%)
K = 0.65 × (0.25 × 2.59 + 0.75 × 0.78) = €0.80m

Unhedged

€1.68m

Hedged (€10m CDS)

€0.80m

β-floor minimum

€0.42m

However perfect the hedging, 25% of the unhedged charge survives — the β floor prices residual basis and model doubt.

Changes & sources

CRR2 → CRR3

Before	Now
Advanced CVA (VaR-based, own models) + old standardised	Internal models abolished: SA-CVA (approval) / BA-CVA / simplified
Exemptions invisible	Exemptions retained but computed & reported
Basel 2017 calibration	2020 recalibration: DS = 0.65 · m_CVA = 1.0 · broader index hedges

Where the law lives

Art 381–386 CRR; EBA RTS on SA-CVA sensitivities and proxy spreads; the CCR inputs come from Part 3 Title II Ch 6 (03·A). Basel text: MAR50.

Open items

The Commission's review of the exemptions — the largest EU-vs-Basel gap left in the framework.
Interaction with the FRTB timeline: CVA sensitivities share infrastructure with A-SA; the 2027 start disciplines both.

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