Wolters Kluwer: Credit Valuation Adjustment Analysis
Posted: 30 April 2013 | Source: Wolters Kluwer
The volatility in the value of the credit portfolios is one of the most challenging issues in the financial industry, which increased in intensity since the turmoil surrounding major defaults in the US (ie Enron, Marconi,
etc), downturns in stock markets around the world, the bailout of banks by national governments and the Eurozone uncertainty.
In the credit financial crisis, which highlighted deficiencies in the financial institution’s approach to managing risk, most losses occurred due to credit portfolios volatility rather than default events. A downstream effect of the uncertainty about the size of the changes had a direct impact on the liquidity of the credit portfolios. Moreover, the paper published by the Basel Committee on Banking Supervision1 highlighted that
“Banks will be subject to a capital charge for mark-to-market losses (i.e., credit valuation adjustment risk) associated with deterioration in the credit worthiness of a counterparty.”