25 February 2015
The European Banking Authority (EBA) published today an Opinion addressed to the European Commission on several aspects related to the calculation of own funds requirements for Credit Valuation Adjustment (CVA) risk. The sixteen policy recommendations in the Opinion build on an extensive technical analysis conducted by the EBA, which is also published today in the form of a Report and a Review. Based on the findings of the Report, the Commission may adopt a delegated act.
The CVA data collection exercise conducted by the EBA on a sample of 32 banks across 11 jurisdictions has highlighted the materiality of the CVA risks that are currently not covered by EU legislation due to some exemptions provided for in the Capital Requirements Regulation (CRR). Overall, the EBA is of the opinion that EU exemptions on the application of CVA charges should be reconsidered or removed, since they leave potential risks uncaptured. However, the EBA also thinks that any action should be taken in this regard only after a Basel review of the CVA framework as part of the fundamental review of the trading book.
In the meantime, however, the EBA is proposing policy recommendations that can be implemented in the short-term, which will provide clarification and convergence in the implementation of the current CVA framework in the EU.
In addition, in order to partially address the risks generated by the current EU exemptions, the EBA recommends monitoring the impact of the transactions exempted from the CVA risk charge, and defining potential situations of excessive CVA risks, which could be taken into account as part of banks' Supervisory Review and Evaluation Process (SREP).
In this respect, the EBA will issue guidance specifying what may lead to a situation of excessive CVA risk, thus allowing competent authorities to decide whether or not supervisory measures should be taken depending on the specific situation of each institution. As supervisory measures cannot materially reverse the effect of exemptions that are enshrined in EU regulation, additional own funds requirements should never be calibrated in such a way to request capital requirements that replicate in full or in substantive part the international standards that have not been implemented into EU legislation. Over the course of 2015, the EBA will provide details in terms of process and timeline, as well as on the potential thresholds that could presumably lead to excessive CVA risks, which could be applied for the 2016 SREP process, at the earliest.
Finally, in light of the Regulatory Consistency Assessment Programme (RCAP) for the European Union published on 5 December 2014 by the Basel Committee on Banking Supervision (BCBS) and with a view to re-establishing international consistency in the implementation of the Basel CVA framework, the EBA is making policy recommendations aiming at addressing the inconsistencies of the current standards. In particular, the EBA recommends that the CVA risk charge should be re-aligned with actual CVA risk so as to better reflect banks' internal practices and ensure that a prudent capture of CVA risks does not generate unintended market distortions or wrong incentives for banks.
The report has been developed in accordance with Article 456(2) of the CRR, which mandates the EBA to monitor the own funds requirements for CVA risk and report on all aspects of the CVA framework.
The review has been developed in accordance with Article 382(5) of the CRR, which mandates the EBA to review the application of CVA charges to non-financial counterparties (NFCs) established in a third country.
The final report and review have been sent today to the European Commission.