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Abstract
Regulators claim two-thirds of the losses suffered by banks in the aftermath of the collapse of Lehman Brothers in 2008 were due to the sliding creditworthiness of derivatives counterparties, so it was no surprise that the Basel Committee on Banking Supervision responded by introducing a new capital charge for the credit valuation adjustment that measures this exposure. In July 2012, the European Banking Association gave its opinion through a technical standards paper aimed at providing clarity for the standardisation of proxying methodology. Its approach, known as the intersection method, is to split liquid credit default swaps into sub-categories known as buckets -- by rating, geography, sector or other categories. With the cross-section method, the authors have the flexibility to set the categories much more finely than they could with the intersection method, since it is much less likely to have sparsely populated categories. Further, it seems also to behave more sensibly when it comes to ratings order.