Inputs and Questions for Basel SA-CVA Calculation

Summary

The document outlines the three broad input categories it associates with the Basel standardized approach for credit valuation adjustment risk: a market-implied probability-of-default term structure, market-consensus expected loss given default, and simulated paths of discounted future exposure. It asks whether the default probabilities can be derived from market CDS spreads by fitting a piecewise-flat hazard curve, whether expected loss given default corresponds to one minus recovery, whether exposure paths come from internal model method simulations, and how the inputs combine into regulatory CVA.

The text is a set of questions and offers no answers, calculation steps, or numerical example. It therefore introduces the components and highlights points a practitioner must resolve, but does not establish the applicable Basel conventions or explain the regulatory aggregation. In particular, market-implied default measures, loss assumptions, exposure generation, and discounting require definitions consistent with the relevant rules and approved modeling framework. Readers should treat the document as a problem statement rather than a complete guide to SA-CVA implementation.

Key ideas

• The document identifies default probability, expected loss given default, and discounted exposure paths as SA-CVA inputs.
• It asks whether CDS spreads can be used to infer a hazard-rate term structure.
• It raises the relationship between expected loss given default and recovery assumptions.
• It asks how simulated exposure paths relate to internal model method simulations.
• No answers or worked regulatory CVA calculation are provided.

Tags

# Calculation Regulatory CVA according to Basel 3 rules


# Calculation Regulatory CVA according to Basel 3 rules












According to the Basel 3 rules (https://www.bis.org/basel_framework/chapter/MAR/50.htm), a bank with approval can use the Standardised approach for credit valuation adjustment risk (SA-CVA). For this, the bank must calculate regulatory CVA for each counterparty based on at least the following three sets of inputs: (a) term structure of market-implied probability of default (PD); (b) market-consensus expected loss-given-default (ELGD); and (c) simulated paths of discounted future exposure.

I have the following queries:

- How is market implied PD calculated? - Is this calculated using the same approach as used in CDS pricing : to calibrate the model to the market time-zero survival probability curve (use the term structure of CDS spreads for the counterparty observed in the market for various tenors, assume a piecewise flat hazard rate term structure and iteratively solve for the $\lambda$'s?

- How is the ELGD calculated? - Is this the same as the 100% - recovery rate (generally 40%) used in CDS pricing?

- Are the simulated discounted future exposure paths an output of the monte carlo IMM models?

- How is the Regulatory CVA calculated using the PD, ELGD and discounted future exposure paths?

Any help is really appreciated.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.