Bilateral CVA encompasses the credit valuation adjustment that considers the default risk of both parties in the transaction. It reflects the potential exposure if either party defaults, making it relevant when stress testing both parties’ defaults.

Things to Remember

• Bilateral CVA (BCVA) accounts for the possibility of both the counterparty and the financial institution defaulting and consists of both CVA and DVA components.
• The inclusion of BCVA in stress testing allows financial institutions to consider their own creditworthiness in addition to that of their counterparties.
• When estimating BCVA, institutions must take into account the correlation between their own credit spreads and those of their counterparties.