CVA's cousin: Dealers try to value early termination clauses

Adjustment anxiety

Damiano Brigo

Since the collapse of Lehman Brothers three years ago this month, banks, regulators and accountants have been struggling to ensure default risk is priced, reported and capitalised accurately through the use of credit value adjustment (CVA) and its more controversial twin, debit value adjustment (DVA).

Now, the implications of another type of counterparty risk are beginning to occupy quants and dealers. It’s a new creature that doesn’t even have a proper name yet. All anyone knows is that it

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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