Valuation Adjustments or Reserves
CA-8.2.10
Banks must establish and maintain procedures for considering valuation adjustments/reserves. CBB expects banks using third-party valuations to consider whether valuation adjustments are necessary. Such considerations are also necessary when marking to model.
Apr 08CA-8.2.11
CBB expects the following valuation adjustments/reserves to be formally considered at a minimum: unearned credit spreads, close-out costs, operational risks, early termination, investing and funding costs, and future administrative costs and, where appropriate, model risk.
Apr 08CA-8.2.12
Bearing in mind that the underlying 10-day assumption of the market risk rules may not be consistent with the bank's ability to sell or hedge out positions under normal market conditions, banks must make downward valuation adjustments/reserves for these less liquid positions, and to review their continued appropriateness on an on-going basis. Reduced liquidity could arise from market events. Additionally, close-out prices for concentrated positions and/or stale positions should be considered in establishing those valuation adjustments/reserves. Banks must consider all relevant factors when determining the appropriateness of valuation adjustments/reserves for less liquid positions. These factors may include, but are not limited to, the amount of time it would take to hedge out the position/risks within the position, the average volatility of bid/offer spreads, the availability of independent market quotes (number and identity of market makers), the average and volatility of trading volumes, market concentrations, the aging of positions, the extent to which valuation relies on marking-to-model, and the impact of other model risks.
Apr 08CA-8.2.13
Valuation adjustments/reserves made under paragraph CA-8.2.12 must impact Tier 2 regulatory capital and may exceed those made under financial accounting standards.
Apr 08
