EBA Peer Review finds credit valuation adjustment risk is overall supervised sufficiently and recommends some follow-up measures to further strengthen supervision

EBA published a peer review report on the exclusion of transactions with non-financial counterparties established in a third country from CVA risk.
The peer review focused on four competent authorities and analyzed their supervisory practices regarding the assessment of CVA risk and the exclusion of transactions with non-financial counterparties from own funds requirements for CVA risk. The review aimed to strengthen consistency and effectiveness of supervision in this area and ensure alignment with the treatment of non-financial counterparties in the EU.
The peer review found that the competent authorities assessed CVA risk sufficiently and used different approaches that were fit for purpose and compliant with regulatory requirements and EBA guidelines. However, the review also identified areas where supervision could be strengthened, so the EBA has adopted follow-up measures for all competent authorities to address these areas.
The follow-up measures include reviewing resource allocation to ensure proper supervision of CVA risk, monitoring the intrinsic risk and capital impact of CVA exemptions, assessing CVA risk from securities financing transactions, ensuring full application of the EBA’s guidelines on supervisory review and evaluation process, and reviewing compliance with technical standards in this area.
The review also identified best practices developed by some competent authorities, including keeping institutions informed about supervisory expectations on CVA risk management and addressing identified deficiencies. These best practices promote a holistic view of CVA risk by considering similar risks and interactions with valuation practices, accounting rules, and other adjustments.
The peer review report provides detailed findings and recommendations for each area assessed, and the EBA plans to conduct a follow-up review in two years to assess the actions taken by competent authorities.