The Basel Committee issued a consultative document on the application of own credit risk adjustments to derivatives.
The Basel III rules seek to ensure that deterioration in a bank's own creditworthiness does not at the same time lead to an increase in its common equity as a result of a reduction in the value of the bank's liabilities.
The application of paragraph 75 to fair valued derivatives is not straightforward, since their valuations depend on a range of factors other than the bank's own creditworthiness. The consultative paper proposes that debit valuation adjustments (DVAs) for over-the-counter derivatives and securities financing transactions should be fully deducted in the calculation of Common Equity Tier 1. It briefly reviews other options for applying the underlying concept of paragraph 75 to these products and the reasons these alternatives were not supported by the Basel Committee.
The Basel Committee welcomes comments on all aspects of this consultative document by Friday, 17 February 2012.
Press release
© BIS - Bank for International Settlements
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