EBA publishes final draft technical standards on prudent valuation

31 March 2014

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) laying out the requirements related to prudent valuation adjustments of fair valued positions. The objective of these draft RTS is to determine prudent values that can achieve an appropriate degree of certainty while taking into account the dynamic nature of trading book positions. These standards will be part of the EU Single Rulebook in banking aimed at enhancing regulatory harmonisation. Update: on 23 January 2015 the European Banking Authority (EBA) published an amended version (EBA/RTS/2016/06/rev1) of its final draft Regulatory Technical Standards (RTS) on Prudent Valuation. All occurrences of ‘volatility' in Article 9 and Article 10 of the final draft RTS published on 31 March 2014 were replaced by ‘variance' for the purposes of computing market price uncertainty and close-out costs additional valuation adjustments (AVAs).

The EBA final draft RTS on prudent valuation put forward a methodology to calculate additional valuation adjustments (AVAs) for the purpose of determining the prudent value of fair valued positions. Two approaches are proposed in order to take proportionality into account, in particular for those institutions with limited exposure to fair valued positions:

  • A Simplified approach, which can be used by institutions to calculate AVAs, provided their absolute value of on- and off-balance sheet fair valued assets and liabilities is below EUR 15 billion and provided they are not part of a group that exceeds this threshold;
  • A Core approach, which is intended to provide a consistent framework for determining AVAs under a target level of certainty of 90%, using either a data based or expert based approach and including diversification benefits.

These final draft RTS reflect both the feedback received from the consultation document, as well as the results of the Quantitative Impact Study (QIS). The QIS was completed on a "best efforts" basis by 59 institutions across 15 jurisdictions. The QIS results showed that on average the expected AVA would be equivalent to 1.5 % of the CET1 of institutions in absolute terms (on average EUR 227 million per institution), which is on average 0.07 % of the value of fair-valued positions on banks' balance sheets. These results were used in the final calibration of the prudent valuation framework.

Legal basis and next steps                                                                     

These final RTS have been developed in accordance with Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 (CRR) on prudential requirements for credit institutions and investment firms.

The approach for calculating AVAs is directly linked to the valuation approach applied under accounting requirements. Therefore, if future accounting requirements alter the approach for determining a fair value, the EBA will consider whether to amend these RTS. 

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Franca Rosa Congiu

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