On 30 May 2023, the European Banking Authority (EBA) published a peer review report on excluding transactions with non-financial counterparties established in a third country from credit valuation adjustment (CVA) risk.
The global financial crisis of 2007-2008 revealed that CVA risk was a source of unexpected losses. Robust CVA management mitigates against losses and helps ensure the soundness of an institution.
The EBA peer review analysed the effectiveness of Member State competent authorities’ (NCAs) supervisory practices regarding their assessment of CVA risk of the institutions under their supervision with a view to strengthening consistency and effectiveness of supervision in this area.
The peer review found that the NCAs assessed CVA risk sufficiently although some elements of such an assessment were missing. Therefore, the EBA has set out a series of follow up measures including that NCAs:
- Review their resource allocation to ensure that CVA risk is properly supervised at all times and for all institutions under their supervision.
- Monitor the intrinsic risk and potential capital impact on the CVA exemptions, assess the CVA risk stemming from securities financing transactions and develop criteria/benchmarks to determine their incorporation in the own funds requirements for CVA risk.
- Ensure that they fully apply the EBA’s Supervisory Review and Evaluation Process (SREP) guidelines by having supervisory engagement with all institutions in relation to CVA risk.
- Ensure that they have performed a review of compliance with the requirements of the technical standards in this area, and continue to perform such a review with a frequency consistent with that set out in the EBA SREP guidelines.
The peer review also identified best practices developed by some NCAs that might be of benefit for other NCAs to adopt. These include best practices in relation to keeping institutions informed regarding any supervisory expectations on the management of CVA risk and actions to address possible deficiencies that may have been identified. They also cover the supervision of CVA risk, which ensures a holistic view by taking into account risks of a similar nature, such as market and counterparty credit risk, and interaction with valuation practices, accounting rules and other types of adjustments, such as x-value adjustments.