The CVA-CDS feedback loop

Dealers claim regulators have cooked up a pro-cyclical credit value adjustment (CVA) capital charge that encourages CVA desks to buy credit default swap protection as a hedge. This could push spreads wider, increasing the CVA capital charge and so prompting more protection buying

cva-blackboard

Following more than a year of wrangling, European parliamentarians managed to persuade the Polish presidency of the European Union to support tough restrictions on so-called ‘naked’ sovereign credit default swaps (CDSs) – the buying of protection on government debt as an outright short position. The deal, announced on October 18, was hailed as a great victory. Since Germany imposed a unilateral ban on the naked short selling of sovereign CDSs in May 2010, the market had been seen by many as a

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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