Capital or P&L? Deutsche Bank losses highlight CVA trade-off

Critics of Basel III’s credit valuation adjustment (CVA) capital charge have long warned it would produce perverse incentives. Now, in the form of a string of quarterly losses in Deutsche Bank’s CVA hedging programme, they believe they are being proved right. Laurie Carver reports

Bankers talk a lot about capital requirements these days. They’re very important, they say; we must optimise them, they say. But how important are they? How much should a bank pay to cut capital usage?

Deutsche Bank has given some answers to that in recent quarterly statements. In the first half of the year, the bank cut the risk-weighted assets (RWAs) generated by Basel III’s charge for derivatives counterparty risk – or credit valuation adjustment (CVA) – from €28 billion to €14 billion. The