Counterparty risk capital and CVA
Basel III has incorporated credit valuation adjustment (CVA) in calculations of regulatory capital for counterparty credit risk (CCR). CVA appears via a completely new CVA capital charge and a downward adjustment of exposure-at-default. In this article, Michael Pykhtin proposes a general framework for calculating capital for CCR that consistently incorporates CVA. The framework is used to analyse the treatment of CCR under Basel II and Basel III
Counterparty credit risk (CCR) is one of the primary focus points of the recent changes to regulatory minimum capital requirements, now commonly known as Basel III (Basel Committee on Banking Supervision (BCBS), 2010). Among other things, Basel III has introduced the concept of credit valuation adjustment (CVA) into calculations of the CCR capital charge. CVA appears twice in the Basel III minimum capital requirements for CCR.
In addition to the default capital charge, banks are required to
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