JPMorgan-Chase just reported third quarter results including a significant item: A $1.9 billion pretax ($0.29 per share after-tax) benefit from debit valuation adjustment (“DVA”) gains in the Investment Bank, resulting from widening of the Firm’s credit spreads.
This is the ‘own credit risk’ problem. Gains from fair value accounting on your liabilities because your own discount rate has increased because your credit worthiness has deteriorated. (So the fair value of your liabilities decreases (debit the debt) and an unrealized holding gain is recognized (credit gain).)
Debit valuation adjustment?? Ay Ay Ay Yi.