Global Banks are Adopting Standardised CVA over IMA-CVA

Contents

1. Introduction

2. About CVA and SA-CVA

3. Benefits of SA-CVA

4. Challenges with IMA-CVA

5. Approach for Banks

6. Summary

7. References

Introduction

CVA reflects the market value of counterparty credit risks, the expected loss if a counterparty defaults. The rise in CVA-related capital for global banks stems from new regulations and increasing derivatives complexity. CVA assesses counterparty risk for OTC derivatives. Basel’s new rules replace prior methods with SA-CVA and BA-CVA, removing IMA CVA, and are more conservative, raising capital requirements, especially for banks relying on internal models.

Under Basel III Endgame and the EU’s CRR III, European banks must switch from IMA-CVA to SA-CVA by January 1, 2025, with reporting starting in March and transitional provisions in place through 2026. This change addresses concerns about IMA-CVA’s complexity, cost, and inconsistent results, which hinder comparability. Though IMA-CVA could lower capital if properly implemented, it often caused excessive variability and underestimated risk. The Basel III Output Floor caps capital relief from internal models at 72.5%, discouraging their use. Regulators now seek a more transparent, more comparable framework through SA-CVA. 

Danske Bank’s CVA-related capital requirements have increased due to the transition to SA-CVA under CRR III and the Basel III output floor constraints. Nearly all banks report significant increases in CVA RWAs — from about 20% to over 150%, reflecting regulatory shifts toward standardised methodologies. Depending on the region and modelling approach, this trend underscores CVA as a key factor driving new capital requirements. 

This paper outlines both the challenges (such as higher CVA RWAs, stricter hedge recognition, and costly system changes) and the benefits (comparability, transparency, reduced model risk, and simpler governance) of moving from IMA-CVA to SA-CVA/BA-CVA.

About CVA and SA-CVA

SA-CVA is designed on the same sensitivity-based principles as the Fundamental Review of the Trading Book (FRTB). CVA risk is captured through sensitivities (delta and vega) to credit spreads, interest rates, foreign exchange, and other risk factors. This ensures that CVA capital requirements align with market risk, simplifying integration into banks’ overall risk frameworks.

Standardised Approach (SA-CVA): This is the new primary approach. It is a risk-sensitive method based on fair value sensitivities to various risk factors (credit spreads, interest rates, foreign exchange rates, etc.). It requires regulatory approval to use.

Basic Approach (BA-CVA): This is the default approach for banks that don't meet the requirements for SA-CVA or choose not to use it. It is simpler but generally more conservative, with limited recognition of hedges. Small banks and entities implement BA-CVA as a risk measure.

Key features of SA-CVA include:

• Sensitivity-Based Approach: The SA-CVA requires banks to calculate CVA sensitivities for various risk factors, such as interest rate, foreign exchange, and credit spread risks. This approach is similar in principle to the Standardised Approach for Market Risk (SA-TB), but with some simplifications.

• Supervisory Approval: Although it is a standardised approach, using SA-CVA requires prior supervisory approval. Banks must meet detailed requirements for data, sensitivity modelling, and governance, similar to those for internal models.

• Explicit Hedging Recognition: The framework provides improved recognition of eligible credit risk and exposure hedges, which was a significant limitation of the previous approaches.

By adopting SA-CVA, banks gain:

• Cross-risk consistency: alignment between counterparty credit risk and market risk.

• Transparency and comparability: more transparent, uniform rules.

• Operational efficiency: reduced model governance and supervisory burden.

This shift clarifies the split between regulatory CVA, which drives capital, and economic XVA, which influences pricing, hedging, and funding. Importantly, this regulatory simplification allows banks to separate two dimensions of CVA:

1. Regulatory CVA — used for capital purposes under SA-CVA.

2. Economic CVA (and broader XVAs) used for pricing, hedging, and funding decisions.

Two clear mandates: Regulatory vs Economic XVA

Mandate	Purpose	What counts	Primary owners	Success metrics
Regulatory CVA (capital)	Satisfy SA-CVA/BA-CVA + reporting	Sensitivities, RF mappings, hedging recognition, governance	Market Risk (1LOD) + Regulatory Capital teams, Model Risk	Timely/accurate SA-CVA; capital stability vs plan; clean audit/validation
Economic XVA (P&L + pricing)	Price/manage actual costs/benefits (CVA/DVA/FVA/MVA/KVA)	Trade pricing, hedge P&L, funding usage, collateral	XVA trading/structuring + Treasury/Funding	Risk-adjusted return uplift (RAROC), hedge effectiveness, and cost-of-capital reduction

Economic XVA: The broader set of valuation adjustments (including CVA, DVA, FVA, MVA, and KVA) used for business purposes such as pricing, hedging, and internal risk management. This is where banks continue to innovate and where quantitative resources are being focused to maintain a competitive edge.

Benefits of SA-CVA

The transition to SA-CVA provides several benefits: By narrowing capital requirements to CVA, regulators reduce model risk and increase comparability. Banks benefit because they can stop maintaining capital-intensive models for all XVAs, focusing instead on CVA for regulatory purposes and XVA for business economics.

• Simplicity and comparability: A standardised approach that improves transparency across institutions.

• Capital stability: Reduced variability in capital outcomes compared to internal models.

• Clearer hedging rules: Recognition of specific hedges (e.g., single-name CDS, index CDS, eligible IR/FX hedges).

• Operational efficiency: Lower validation costs and simpler governance.

Crucially, SA-CVA enables banks to focus quantitative resources on economic XVA, where innovation and efficiency matter most:

• Economic CVA hedging: Broader instruments and longer horizons, with joint optimisation alongside FVA and MVA.

• Regulatory CVA hedging: Focused on recognition rules to minimise capital volatility.

Best practice for banks is to maintain two hedge books: one for regulatory CVA (capital-driven) and one for economic XVA (P&L- and funding-driven). This separation prevents cross-subsidisation and ensures transparent P&L reporting.

Challenges vs. Benefits of SA-CVA and BA-CVA Implementation

Aspect	SA-CVA Challenges	SA-CVA Benefits	BA-CVA Challenges	BA-CVA Benefits
Capital Impact	Higher RWAs (20–150% increases reported); Output Floor reduces capital relief	More risk-sensitive and aligned with FRTB sensitivities	Typically more conservative, often higher capital than SA-CVA	Predictable and simpler capital outcomes
Complexity	Requires trade-level sensitivities; sophisticated data and systems	Risk-sensitive approach improves alignment with market risk	Limited hedge recognition; less risk sensitivity	Straightforward calculations with lower operational burden
Hedge Recognition	Partial recognition of CDS, IR, FX hedges; some strategies not fully captured	Provides more straightforward rules and consistency across banks	Minimal hedge recognition	Easy to apply without advanced models
Operational Demands	Significant system upgrades, sensitivity mapping, and governance improvements	Greater transparency and comparability across institutions	Less demanding in terms of systems and governance	Suitable for smaller banks with limited resources
Strategic Implications	Forces separation of regulatory CVA vs. economic XVA; need for dual hedge books	Creates a more apparent distinction between capital compliance and business economics	Less flexibility for active hedging and optimisation	Enables compliance for banks not pursuing advanced methods

Challenges with IMA-CVA

Removal of the Internal Model Approach (IMA-CVA): This was a deliberate policy decision to address several shortcomings of the old framework. IMA-CVA presented significant challenges, both technical and supervisory:

Inconsistent Results: IMA-CVA was criticised for producing inconsistent and non-comparable capital charges across different banks for similar portfolios.

Technical Challenges

• Requirement for full Monte Carlo simulations of future exposures.

• Complex modelling of wrong-way risk, optionality, and collateral agreements.

• Thousands of risk factor mappings across counterparties, trades, and hedges.

• High computational and infrastructure costs.

Supervisory Challenges

Regulators lacked the tools and resources to consistently validate the complex internal CVA models, creating a "black box" problem in which they couldn't effectively challenge capital outcomes.

• Few banks implemented IMA-CVA correctly or consistently.

• Results across institutions lacked comparability, undermining regulatory objectives.

• Supervisors struggled to validate internal models, often lacking the tools to challenge outcomes effectively.

Approach for Banks

Banks are actively reviewing their portfolios to identify the key factors driving CVA capital increases. They aim to optimise their portfolio structure, possibly by reducing exposure to certain counterparties or derivatives, to lower their risk-weighted assets (RWA). 

Revise Hedging Strategies: With the new rules, banks must reassess their CVA hedging strategies. This includes considering new eligible hedges, maximising the use of existing ones, and potentially adjusting trading strategies to better align with the capital framework.

Improve Governance: There is an increased focus on establishing transparent governance and reporting lines for CVA risk. This involves closer cooperation among front-office trading, risk management, and IT departments to ensure consistent, accurate CVA calculations and risk management practices.

Engage with Regulators: Many banks are proactively engaging with their national regulators to discuss the implementation of the new CVA framework. This helps them understand local differences, resolve calibration issues, and seek approval for specific modelling approaches where still applicable.

Transitioning to SA-CVA requires banks to act across multiple areas: They must prioritise CVA for regulatory reporting and capital purposes, even if they continue to manage the broader XVA stack internally.

Model Refactoring

• Redevelop exposure modelling and sensitivity calculation engines to meet SA-CVA requirements.

• Align methodologies with FRTB sensitivities, ensuring consistency in data and calibration.

• Reconfigure hedge books, separating regulatory CVA hedging from economic XVA optimisation. 

Data and Reporting Enhancements

• Build a robust data infrastructure to capture trade-level sensitivities to credit spreads, CSA terms, and market risk factors.

• Ensure compliance with European Banking Authority (EBA) Implementing Technical Standards (ITS) on supervisory reporting.

• Enhance data and systems to meet SA-CVA’s sensitivity-driven requirements.

Capital Allocation Shifts

• Recognise that SA-CVA, combined with the Output Floor, may result in higher CVA capital and RWA.

• Optimise CVA desks to manage these capital impacts through hedging strategies and portfolio steering.

Regulatory Consistency

• Adapt to the European Central Bank’s harmonised approach to exercising CRR III discretions.

• Leverage uniform treatment across the Banking Union for predictability in CVA-related capital options.

Technology Enablement 

Enhance Data and Systems: The new CVA framework requires more granular data and sophisticated systems. Banks are investing in technology to improve their data infrastructure and CVA calculation capabilities, which is essential for accurate reporting and compliance. 

• Invest in XVA engines capable of handling SA-CVA sensitivities and economic CVA simulations.

• Adopt AI, machine learning, and neural networks for faster exposure calculations and proxy curve generation.

Summary

Regulatory requirements under Basel III and CRR III prompt the shift from IMA-CVA to SA-CVA. Internal models were expensive, inconsistent, and unclear. SA-CVA offers comparability, simplicity, and regulatory confidence, though it comes with higher capital charges. Nearly all global banks have reported substantial increases in CVA RWAs since adopting this approach.

By adopting SA-CVA for capital requirements and focusing on innovation, banks can enhance transparency, comparability, and operational efficiency while optimising profit and loss (P&L) and funding outcomes. Those that act early—by aligning governance, investing in technology, and revising hedging strategies—will achieve both regulatory resilience and a competitive advantage.

This shift rebalances priorities: CVA is now a compliance-driven capital charge, while economic XVA remains the space for innovation and competitive advantage. By adopting sensitivity-based methods, investing in data and technology, and maintaining dual hedge books, banks can both comply with regulatory standards and continue to optimise pricing, hedging, and funding. The result is not just compliance, but also resilience and strategic differentiation in the evolving global risk landscape.

References

1. Basel paper on CVA -  https://www.bis.org/basel_framework/chapter/MAR/50.html

2. https://www.bankofengland.co.uk/prudential-regulation/publication/2022/november/implementation-of-the-basel-3-1-standards/credit-valuation-adjustment

3. https://www.risk.net/risk-quantum/7961911/danske-shrinks-cva-capital-charges-44-after-hedge-revamp

About the Author

Ravi Bhushan

is a Director at Solytics Partners. Working at Solytics, Ravi advises various large global and regional banks across multiple jurisdictions on market, modelling, and model risks. Solytics Partners is a global services and solutions provider in Risk, Compliance, Analytics and Technology. For more information about their work, you can visit https://www.solytics-partners.com/.