Model foundations of Basel III standardised CVA charge
The credit valuation adjustment (CVA) capital charge in Basel III comes in two flavours: advanced (simulations) and standardised (formula). In this article, Michael Pykhtin shows that the standardised CVA charge formula can be obtained by adding several conservative adjustments to an analytical approximation of CVA value-at-risk
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One of the primary focus points of Basel III rules on minimum capital requirements issued by the Basel Committee on Banking Supervision (2010) has been counterparty credit risk (CCR). Among other things, Basel III has introduced the concept of credit valuation adjustment (CVA) into calculations of the CCR capital. In particular, in addition to the default capital, banks are required to calculate a CVA capital charge. This accounts for losses
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