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Implementation of CVA and DVA can help manage credit risk 

April 23, 2015

Madhvi Mavadiya, Treasury Insider

The International Financial Reporting Standards (IFRS) are changing banking regulations to encourage corporates to apply Credit Valuation Adjustment (CVA) and Debt Valuation Adjustment (DVA) to their operations in order to focus on incorporating credit risk in financial instrument valuations.

Credit risk is when a financial reward is lost because the borrower could not repay a loan, but is expecting to use future profits to pay off a current debt. The European sovereign debt crisis between 2008 and 2011 left a number of Eurozone member states unable to repay their government debt. This highlighted the need for accurate credit pricing at the start of transactions and the exposure of trade credit to predict credit risk early.

The crisis also revealed that there were weaknesses in how financial institutions were incorporating credit risk into their disclosure, risk management and the valuation of financial instruments (real or virtual documents representing a legal agreement involving monetary value).

This week it was reported that Deutsche Bank’s credit risk has risen and the bank’s bondholders are concerned that a sale of the retail business in order to concentrate on investment banking would deprive them of deposits needed for funding. 

Read more: Treasury Insider

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