European banks seek capital relief for CVA hedges
Volatile trading in March caused CVA hedges to dominate market risk RWAs at some smaller dealers
European banks are pinning the blame for a surge in market risk charges on an unlikely culprit: hedging of counterparty credit risk in uncollateralised derivatives.
With the counterparty risk of corporate clients rising in the wake of the coronavirus outbreak, banks have seen credit valuation adjustment (CVA) exposures climb significantly since March. At the same time, banks’ hedges of the interest rate and foreign exchange aspects of CVA moved deeply in-the-money, offsetting some of the pain
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