DVA: a 'shameful scam'

Despite the attempts of some quants to give it a sturdy foundation, debit valuation adjustment remains a scam, one critic argues. Laurie Carver introduces this month’s technical articles

Debit valuation adjustment (DVA) is wildly controversial, and it is not hard to see why. Mark-to-market accounting standards require it to be included in derivatives prices as a reflection of a dealer’s own default risk – but the result is a paper gain when the creditworthiness of a bank slips, and a loss when the institution becomes more robust.

Some have called for it to be banned – that is, removed from accounting standards – because of the perverse incentives it creates. Others have argued