Quants continue to criticise counterparty risk measures

The Basel Committee modified its method for calculating the capital charge for credit value adjustment at the end of last year, following widespread criticisms from the industry. But quants continue to campaign for revisions that will allow them to take a more sophisticated approach. By Laurie Carver

Counterparty risk, and in particular the treatment of credit value adjustment (CVA), was always going to be a major focus for regulators post-crisis. The Basel Committee on Banking Supervision estimates two-thirds of credit risk losses during the financial crisis were caused by CVA volatility, rather than actual defaults – a figure that led the committee to propose a methodology for calculating a CVA capital charge in December 2009.

The original proposal, which included a so-called equivalent