Let us return from the world of accountancy standards to the world of counterparty risk. There is clearly a debate over how reasonable the use of DVA is. This debate really hinges around to what extent an institution can ever realise a DVA benefit in a reasonable economic way. These arguments are discussed by Gregory (2009a) and are expanded upon below. Note that, in the case of a CSA, the monetisation of DVA must be done over the margin period of risk, i.e., in the days prior to an institution's default. The monetisation of this benefit during the last days before bankruptcy may appear even more difficult.
An institution can obviously realise the BCVA component by going bankrupt but, like an individual trying to monetise their own life insurance, this is not relevant. In fact, this becomes a circular argument; consider a firm with a DVA benefit so substantial that it can prevent their bankruptcy. Yet it is not possible to reverse a bankruptcy.
Returning to the somewhat macabre example of an individual trying to monetise their life insurance, suppose that one instead were to stand at the top of a tall building and call one's life insurance company, offering to settle the contract at, say, half the value. If the life insurer believed this apparent suicide attempt was genuine, they may indeed be willing to settle.15
The above example is not as naïve as it may at first sound, as it essentially corresponds ...