The enhanced CVA framework has 3 main objectives:

• To enhance risk sensitivity
  The revised CVA framework takes into account the exposure component of CVA risk as well as the risk of associated hedges.
• To enhance robustness of the CVA framework
  The updated guidelines remove the use of an internally modeled approach and instead emphasize the use of two main methods: (I) the standardized approach (SA-CVA), and (II), the simpler basic approach (BA-CVA). In addition, banks with minimal engagement activities in derivative transactions can use their credit counterparty risk (CCR) capital requirements as a proxy for their CVA charge.
• To improve consistency of the CVA framework
  The standardized and basic approaches of the revised CVA framework have been revised to be consistent with the approaches used in the revised market risk framework.

Things to Remember

• Counterparty Credit Risk (CCR): CCR is the risk that a counterparty to a financial contract will default before the contract is settled.
• Credit Valuation Adjustment (CVA): CVA is the adjustment made to the price of a derivative instrument to account for the credit risk of the counterparty.
• Basel Committee on Banking Supervision: The Basel Committee is an international body that provides recommendations on banking regulations and capital requirements to enhance financial stability.