CVA proxying: Nomura's alternative to "flawed" EBA method
The European Banking Authority has proposed a way for banks to calculate a credit valuation adjustment capital charge when credit default swap spreads are absent or illiquid – but it does not solve the problem, argue Eduardo Epperlein, Kyriakos Chourdakis, Marc Jeannin and James McEwen of Nomura, who have an alternative
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Regulators claim two-thirds of the losses suffered by banks in the aftermath of the collapse of Lehman Brothers in 2008 were due to the sliding creditworthiness of derivatives counterparties, so it was no surprise that the Basel Committee on Banking Supervision responded by introducing a new capital charge for the credit valuation adjustment (CVA) that measures this exposure.
What was more surprising was the decision to base the capital charge on credit
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