Expected Credit Loss vs. Credit Value Adjustment: A Comparative Analysis

Abstract

The recent publication of the IFRS 9 norms related to collective provisions for non defaulted instruments has settled a new vision to banking book portfolios. In this paper we show that the IFRS 9 provision measured through the Expected Credit Loss (ECL), inspired from a market vision on loan books, is very similar to the Credit Value Adjustment (CVA) for derivative exposures. However, even if the underlying formulas are identical, the metrics and parameters are not the same. Hence, though ECL and CVA measure similar effects, they involve different modelling challenges.

Keywords: Expected Credit Loss (ECL), IFRS 9, Credit Value Adjustment (CVA), counterparty risk

JEL Classification: C00