The FVA Puzzle: Accounting, Risk Management and Collateral Trading
17 Pages Posted: 1 Nov 2014
Date Written: October 31, 2014
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: Suggested Citation