DVA (Debit Valuation Adjustment)
Quantitative Finance glossary · Quantitative Finance
Definition
Mirror of CVA from the bank's own default perspective: DVA = (1 - R_own)int_0^T ENE(t),dPD_own(t), where ENE is the expected negative exposure (counterparty's mark-to-market gain on us). Counter-intuitively, a wider own-CDS spread increases DVA and therefore P&L — banks reported 'DVA gains' as creditworthiness deteriorated through 2011, prompting Basel III to deduct DVA from CET1 capital. Required for IFRS 13 fair value but explicitly disallowed in regulatory capital.
DVA (Debit Valuation Adjustment) in plain English
When two companies make a deal that pays out over years, each one might not survive to pay what it owes — so accountants adjust the deal's value for that risk. DVA is the weird twist: it's the discount that comes from the possibility that YOUR OWN company might go bust and stiff the other side. Here's the mind-bending part: if your company looks shakier (investors think you're more likely to default), your DVA goes UP, and that actually shows up as a paper profit — you're 'saving' money you might never have to pay. It's like your credit score dropping and your budgeting app cheerily noting you'll probably skip repaying that loan; real accounting rules (IFRS 13) make banks report this, but regulators refused to let banks count it as real safety capital because profiting from your own decline is obviously perverse.
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