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Ninety-two per cent of banks not fully capable of effective CVA calculations

Research by Lepus and SAS finds banks require investment in technology to manage counterparty credit risk effectively

23 July 2012 - New research into counterparty credit risk management, published by Lepus and commissioned by SAS, has discovered that most investment banks are not fully capable of calculating credit valuation adjustment (CVA) effectively, a shortcoming that contributed to the financial crisis of 2008. Only eight per cent said they were unreservedly satisfied with their IT infrastructure and 42 per cent consider their infrastructure to be incapable of meeting business requirements. The research, which sought the views of 39 major institutions, found that most banks' counterparty risk management is impeded by IT infrastructure.

CVA represents a price for assuming counterparty risk and encompasses the risk of eventual default on obligations as well as potential deteriorations in credit quality. Just five per cent of institutions surveyed say they are capable of calculating CVA in near real-time whilst only 24 per cent do so on an intraday basis. This means that most firms do not have up-to-date information on exposures to counterparties when pricing CVA into trades. As a result, most firms have a blind spot in this area that could wound them, Not having an up-to-date view of exposures can be a challenge for firms, particularly in stressed market conditions.

'Wrong way risk', the adverse correlation between credit quality of a counterparty and exposure to that counterparty, is an issue under severe need of address by the institutions surveyed. Only 21 per cent of firms factor in specific and general wrong way risk into their CVA models while nearly half do not consider wrong way risk at all.

With CVA now a mainstay of counterparty risk management, 61 per cent of firms said that they require greater computational power to perform CVA calculations and over half said that they lack up-to-date aggregated data. As effective counterparty risk management requires timely and sophisticated CVA calculations, these findings suggest that most firms need to devote more resources to their IT infrastructure and High-Performance Computing capabilities.

Geoff Kates, Managing Director, Lepus, said, "Over the last few years, we have seen risk management transform from a sorely neglected function at investment banks to a core component of business strategy. The effective management of counterparty risk is now of great importance to both banks and regulators. Calculating CVA accurately is therefore of critical importance in mitigating risk."

James Babicz, Head of Risk, SAS UK & Ireland, commented, "Banks require highly robust IT systems, unimpeded by problems of data aggregation, to calculate CVA effectively. For many banks, especially those still operating in siloes, upgrading to an infrastructure capable of calculating CVA in near-real time across asset classes will be a challenge due to the huge volume and variety of big data that they must analyse. However, the banks that make investments in high-performance analytics sooner rather than later will reap the rewards."

You can download a copy of the report here.

About SAS

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