The FVA Puzzle: Accounting, Risk Management and Collateral Trading

17 Pages Posted: 1 Nov 2014

See all articles by Claudio Albanese

Claudio Albanese

Global Valuation; CASS School of Business

Leif B. G. Andersen

Bank of America Merrill Lynch

Stefano Iabichino

Global Valuation Ltd.

Date Written: October 31, 2014

Abstract

We recently introduced the FVA/FDA accounting framework for funding costs, aiming to provide an accounting method that reasonably balances the, often conflicting, concerns of accountants, regulators, traders, and financial economists. While introduction of FVA/FDA accounting does not lead to write-offs of Net Income, regulatory capital measures and FTP policies are considerably different from those in funding-free accounting regimes. In this paper, we provide a concise comparison of FVA/FDA accounting with the FCA/FBA method currently endorsed by several large banks. We discuss detailed FTP policies, risk management implications, and quantify the notion of funding arbitrage.

Keywords: Funding, FVA, CVA, XVA, stress testing, funding arbitrage, accounting, OTC

JEL Classification: G00, G20

Suggested Citation

Albanese, Claudio and Andersen, Leif B.G. and Iabichino, Stefano, The FVA Puzzle: Accounting, Risk Management and Collateral Trading (October 31, 2014). Available at SSRN: https://ssrn.com/abstract=2517301 or http://dx.doi.org/10.2139/ssrn.2517301

Claudio Albanese (Contact Author)

Global Valuation ( email )

9 Devonshire Sq.
London, London EC2M 4YF
United Kingdom

CASS School of Business ( email )

106 Bunhill Row
London, England EC1Y 8TZ
United Kingdom

Leif B.G. Andersen

Bank of America Merrill Lynch ( email )

One Bryant Park
New York, NY 10036
United States
646-855-1835 (Phone)

Stefano Iabichino

Global Valuation Ltd. ( email )

9 Devonshire Square
London, EC2M 4YF
United Kingdom

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