FT Alphaville » Blog Archive » Banking credit catch-22 in action?

1. taxloss Apr 22 14:43 Is this the counter-cyclicality we were promised?
2. ! Report The Itch Apr 22 14:26 So, you can buy an egg for 7 cents and sell it at 5 for a profit.
3. ! Report Tears for Tier 1 Apr 22 14:17 I keep dreaming that I'm holding a fish, and I can't afford to pay for it.

Own Credit CVA

Now what about Citi? It has the same pricing model as GS, which calculates a FV of $1m. So surely C recognises a financial liability of $1m? No. Again, accounting standards differ slightly in wording, but in principal the fair value of a liability is the price at which an entity could extinguish any future obligations, in an arm's length transaction. I.e. "What price would a counterparty be willing to cancel/settle the trade at now. Well, we have seen above that GS, and probably the rest of the market, would accept $700k to cancel the deal. So, Citi gets to write the liability down to $700k. In accounting terms:

DR Financial Liabilities $300k

CR Principal Transactions $300k

Yes, you have read it correctly - Citi has made a profit of $300k as a result of becoming less creditworthy!!! In accounting/industry spreak, Citi has made an Own Credit CVA of $300k.