18.The standardised approach for calculation of CVA capital is a form of a value-at-risk calculation, an approach commonly used to set capital requirements. Changes in CVA can be viewed as following some distribution, such as the normal distribution illustrated in Figure 2. Conceptually, the general approach to CVA capital is to estimate a level of CVA losses that should be expected to be exceeded no more than a given percentage of the time. The CVA capital calculation reflects a value-at-risk calculation with a one-year, 99% confidence level for CVA risk. Assuming a normal distribution (or equivalently, a log-normal distribution for the underlying risk factors), losses can be expected to be within 2.33 standard deviations of the mean 99% of the time. That concept is illustrated in Figure 2, where the 1% negative tail of the distribution has been highlighted (in this case, σ is the standard deviation).

Figure 2

19. Accordingly, the general form of the CVA capital calculation depends on the standard deviation of CVA losses:

The normality assumption, together with a desired 99% confidence level, is the reason for the inclusion of a 2.33 multiplication factor in the CVA capital formula. Other elements of the CVA capital calculation reflect a theoretical approximation of the variance of changes in CVA.