Earnings discrepancies show confusion over DVA, says Quantifi

An analysis of US bank earnings suggests there is widespread confusion over how to measure so-called debt value adjustment, according to analysis by Quantifi (see original report).

Bank of America reported an $82 million loss, when, by Quantifi's calculations, it should have posted a loss of $474 million.  Citi meanwhile reported a $353 million loss, when it should have posted a much smaller $40 million decline.

The confusion arises from the way in which banks calculate DVA, with some using CDS spreads, some using bond prices and others using a combination of the two. The industry is still debating the best proxy for measuring changes in counterparty exposures, with some arguing that it makes more sense to measure peer counterparty risk using CDS, the normal hedging instrument, and own counterparty risk using bonds. However, this causes a mismatch, which worsens as the bond-CDS basis widens.

Under accounting rules IAS 39 and FAS 157 credit value adjustments must be marked to market at fair value.