It is part of x-value adjustments (XVA). By definition, it captures the impact of regulatory capital (capital costs) on derivative pricing. It reflects the cost of meeting regulatory capital requirements for a derivative position over the course of its time to maturity.
Simply stated, a bank holding derivative contracts will need to increase the capital imposed by regulators- i.e., capital valuation adjustment is the cost of additional regulatory capital. It is a risk premium– the cost of compensating shareholder capital at risk using a given hurdle rate.
Capital valuation adjustment is known for short as KVA.
