Explainer
The two CVA capital approaches side by side: what each one measures, which hedges each recognises, when each is the lower number, and how to settle the choice on your own book rather than by rule of thumb.
There is no general answer. BA-CVA, the basic approach, is a formula on exposure that is simple to run and recognises few hedges. SA-CVA, the standardised approach, is a sensitivities-based charge that recognises far more hedges and follows the risk more closely, at the price of computing CVA sensitivities to every supervisory risk factor. On a hedged, uncollateralised corporate book SA-CVA is usually the lower number. On a collateralised or lightly hedged book BA-CVA can be. The only reliable way to know is to compute both on the book itself, as of one date, with its hedges, netting sets and collateral terms.
Under the Basel framework every bank with a material derivatives business calculates CVA capital under BA-CVA or SA-CVA; the internal-model approach for CVA no longer exists. A bank whose aggregate notional of non-centrally cleared derivatives is at or below EUR 100 billion may instead set its CVA capital at 100% of its counterparty credit risk capital (MAR50.9). In the UK the PRA’s alternative approach, also 100% of counterparty credit risk capital, is open to firms below GBP 88 billion without SA-CVA permission (PRA Rulebook, Credit Valuation Adjustment Risk Part, rule 6.1). Everyone above those lines has the choice in this explainer in front of them.
The choice is not all or nothing. A bank approved for SA-CVA may carve out any number of netting sets and capitalise them under BA-CVA instead (MAR50.8). In practice that means SA-CVA where the sensitivities are available and the hedges matter, BA-CVA for the tail.
BA-CVA comes in two versions.
Reduced BA-CVA ignores hedges entirely. For each counterparty it computes a stand-alone charge from the exposure at default of every netting set, its effective maturity and a supervisory risk weight set by sector and credit quality (MAR50.14 to 50.16):
The discount factor is 1 for a bank that uses the internal model method for exposure. The stand-alone charges are aggregated with a single correlation , and the result is multiplied by a discount scalar of 0.65, introduced in the Basel Committee’s July 2020 revisions to recalibrate BA-CVA against SA-CVA (MAR50.14):
Risk weights run from 0.5% for investment-grade sovereigns to 12% for high-yield or unrated financials and the “other” sector (MAR50.16, Table 1); the UK adds a pension fund sector at 3.5% and 8.5% (PRA Rulebook, Credit Valuation Adjustment Risk Part, rule 4.4). Investment-grade financials, including government-backed ones, sit at 5%, against 1.5% to 3% for most investment-grade corporates, which is why bank and fund counterparties weigh heavily in many BA-CVA numbers.
Full BA-CVA adds hedges, but only one kind: single-name CDS, single-name contingent CDS and index CDS that hedge the counterparty credit spread (MAR50.18), on the counterparty itself, a legally related entity, or a name in the same sector and region (MAR50.19). The final charge is a quarter of the reduced number plus three quarters of a hedged number (MAR50.20), so even a perfect hedge leaves a quarter of the unhedged charge:
How the hedged number is built is set out in CVA hedges and capital. Interest rate, FX, equity and commodity hedges of the exposure itself earn no CVA credit under either version.
What BA-CVA needs: exposure at default per netting set (normally from SA-CCR), maturities, counterparty sectors and ratings. No simulation, no sensitivities.
SA-CVA treats regulatory CVA as a portfolio of market risk and capitalises its sensitivities, much as the FRTB standardised approach does for the trading book. It covers six risk classes: interest rates, FX, counterparty credit spreads, reference credit spreads, equity and commodities, with delta for all and vega for all but counterparty credit spreads. Sensitivities are bucketed, weighted with supervisory risk weights and aggregated with supervisory correlations.
Three things follow.
| BA-CVA reduced | BA-CVA full | SA-CVA | |
|---|---|---|---|
| What drives the charge | Exposure at default, maturity, sector risk weight | Same, less recognised CDS hedges | Sensitivities of CVA to six risk classes |
| Hedges recognised | None | Single-name and index CDS on counterparty spread | CDS plus rate, FX, equity and commodity hedges |
| Risk sensitivity | Low | Low to moderate | High |
| Data and compute | Exposure per netting set | Same plus hedge details | Full CVA sensitivities, at least monthly |
| Supervisory approval | No | No | Yes |
| Typical effect on a hedged corporate book | Highest | Lower if spreads are hedged | Usually lowest |
| Typical effect on a collateralised, lightly hedged book | Can be lowest | Can be lowest | Can be higher |
An illustration with two counterparties under reduced BA-CVA, parameters from MAR50.14 to 50.16, amounts in millions:
| Sector and quality | Risk weight | Exposure at default | Maturity | Discount factor | Stand-alone charge | |
|---|---|---|---|---|---|---|
| Counterparty A | Consumer goods, investment grade | 3% | 100 | 5 years | 0.885 | 9.48 |
| Counterparty B | Bank, investment grade | 5% | 50 | 3 years | 0.929 | 4.97 |
For A: and . Aggregation and capital:
Now suppose the bank hedges the rate moves that drive the exposure to A, with interest rate swaps. Under BA-CVA the 7.64 million does not move: those swaps are not eligible CVA hedges, so they stay in the trading book and attract market-risk capital of their own. Under SA-CVA, eligible hedges are taken out of the market-risk calculation (MAR50.11) and offset the rate sensitivity of CVA directly; only the residual is capitalised. That asymmetry is the whole case for SA-CVA on hedged books.
The illustration is arithmetic on supervisory parameters, not a result for any real book. On a collateralised or lightly hedged book the comparison can go the other way: SA-CVA charges every risk class it measures, and with little hedging there is little to offset.
For many banks the choice was made by the calculation, not by the capital. SA-CVA requires CVA sensitivities to every supervisory risk factor on the whole book, and on the systems in place a full set is a long batch run, with an IT change for every new requirement. Where that build and run cost looked higher than the capital it would save, BA-CVA was the practical answer. In the EU, the exemptions kept under CRR3 for transactions with non-financial counterparties below the clearing threshold, intragroup transactions, pension schemes under the EMIR transitional, and central banks, public bodies and other counterparties with a 0% risk weight (CRR Article 382(4), not reviewed by CRR3) narrowed the book in scope and made the basic approach easier still.
The basic approach also changes behaviour. Under reduced BA-CVA no hedge reduces the CVA charge, and a hedge that is not eligible adds market-risk capital of its own. For a bank on the reduced approach, hedging CVA raises total capital, so many such banks do not hedge CVA at all and carry its P&L volatility instead. Under SA-CVA the same hedges lower capital and steady P&L at once.
The cost is now visible: Risk Quantum reported CVA risk-weighted assets up 73% at 18 European banks in the first quarter of 2025, against the last quarter of 2024, after CRR3 took effect.
Compute both on your own book, as of one date:
Norma’s Capital Study does exactly this on an agreed scope of your book, within days of clean data: SA-CVA and BA-CVA side by side, the hedge benefit, netting-set and counterparty attribution, and the uncovered tail shown with its charge under each approach.
BA-CVA is a formula on exposure at default, maturity and a sector risk weight; its full version recognises only credit default swap hedges on the counterparty spread. SA-CVA capitalises the sensitivities of regulatory CVA to six risk classes and recognises both credit-spread and exposure hedges, but needs CVA sensitivities to every supervisory risk factor, at least monthly, a CVA desk or equivalent function, and supervisory approval.
No. On hedged, uncollateralised corporate books SA-CVA is usually lower. On collateralised or lightly hedged books BA-CVA can be lower. The answer is a property of the book, so the reliable way to know is to compute both on it.
Yes. A bank approved for SA-CVA may carve out any number of netting sets and capitalise them under BA-CVA (MAR50.8).
A bank with non-centrally cleared derivatives notional at or below EUR 100 billion may set CVA capital at 100% of its counterparty credit risk capital (MAR50.9); in the UK the PRA's equivalent applies below GBP 88 billion for firms without SA-CVA permission.
In the EU from 1 January 2025 under CRR3; in the UK from 1 January 2027 under the PRA's Basel 3.1 rules; in the US the March 2026 re-proposal sets no compliance date yet.