Basel DVA capital deduction could cost banks billions

Billions of dollars in capital could be excluded under Basel proposals on derivatives DVA – with US banks hardest hit

Banks could see billions of dollars removed from their stock of capital if regulators go through with a plan to exclude debit value adjustment (DVA) on derivatives portfolios from equity capital calculations. The proposal, published on December 16 by the Basel Committee on Banking Supervision, would also result in conflict between accounting rules and prudential standards.

“A typical dealer’s total DVA could easily be around $2 billion – so excluding this from capital would be very significant for US banks in particular,” says one London-based accounting expert.

Currently, both accountants and regulators are more or less on the same page. DVA captures the component of a liability’s value that relates to the creditworthiness of a reporting bank – as an institution becomes more likely to default, the value of its liabilities is reduced. For derivatives, any changes in that value have to be reported as a profit or a loss under US accounting standard FAS 157, which feeds through into reported equity. FAS 157 gives US banks the option to record own-credit effects on other liabilities in the same way. European banks are subject to International Financial Reporting Standards, which aim to end up in a similar place, but they are less clear than their US counterpart, the accounting expert says – as a result, some European banks report DVA profits and losses, while others do not.

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