Should Additional Value Adjustments (AVAs) be calculated net of tax effects for the purpose of the CET1 deduction in Article 34?
Article 34 of CRR requires an adjustment to fair value, reflecting the uncertainty in a range of factors that make up that balance sheet value and ensuring (via deduction) that capital is provided for against this uncertainty.
Article 8(1) of the Commission Delegated Regulation (EU) 2016/101 states that “AVAs shall only be calculated based on the proportion of the accounting valuation change that impacts CET1 capital.” Therefore, if the accounting valuation change would result in a tax effect that would impact on CET1 capital, this should be reflected in the measurement of the AVA. Under Article 8(1), it is considered that an AVA should have the same impact on CET1 as applying the valuation change in the financial statements or otherwise realising prudent value. Only tax effects that would impact on CET1 capital should be reflected. Therefore, banks should apply the filter set out in Article 34 of the CRR including any tax effects to the extent they result in repayments of tax or a reduction in tax due, when calculating CET 1 capital.
We recognise that the tax treatment of certain deductions is explicitly stated in CRR, such as the treatment of negative amounts resulting from the calculation of expected loss amounts and intangible assets. However, CRR is silent for several other deductions and prudential filters including AVAs.
EBA Q&A 2014_720 confirmed the application of the principle that prudential filters for securitised assets, cashflow hedges and changes in the value of own liabilities should be applied on a net of tax basis. This means that any tax effects are included in the filter in order to fully neutralise the CET1 capital calculation from the tax effects of the associated transaction. The question though did not request guidance in relation to AVAs.
As additional valuation adjustments (AVAs) are not a component of the accounting value, which is the basis of tax calculations, no tax effect related to the AVA-relevant positions should be taken into account for their calculation.
This is irrespective of Article 8(1) of the Commission Delegated Regulation (EU) 2016/101, which is concerned with items, such as those listed in recital (3), for which changes in valuation would have a determinable partial effect on CET1 due to accounting rules or regulatory filters and deductions.
Update 26.03.2021: This Q&A has been reviewed in the light of the changes introduced to Regulation (EU) No 575/2013 (CRR) and continues to be relevant.