Cutting Edge introduction: The origins of the standardised CVA charge

Regulators are attempting to narrow the gap between regulatory capital formulas and banks’ internal models – but recent work in the area of the controversial credit value adjustment demonstrates just how far apart they remain. Laurie Carver introduces this month’s technical articles

Bank regulators have lost their faith in internal models, and are trying to tie them more closely to regulator-set, standardised approaches – through reporting and, possibly, floors or surcharges – but this month’s technical articles illustrate the size of the divide (see pages 16–20). First, Michael Pykhtin, senior economist at the Federal Reserve Board in Washington, DC, presents his personal interpretation of the thinking behind the standardised formula for the credit value adjustment (CVA)