Capital and Funding

14 Pages Posted: 26 Apr 2015 Last revised: 19 Nov 2015

See all articles by Claudio Albanese

Claudio Albanese

Global Valuation

Simone Caenazzo

Global Valuation Ltd

Stéphane Crépey

Université d'Évry - Equipe d'Analyse et Probabilites

Date Written: April 24, 2015

Abstract

Banking operations are being rewired around a pair of KVA/FVA metrics which quantify market incompleteness, i.e. the impossibility of perfect replication. The FVA is the cost of funding of debt liabilities while the KVA is the risk adjustment for equity liabilities, also called cost of capital. The two metrics are intertwined with each other, since equity capital is itself a source of funding, fungible with debt financing.

In this paper, we define the KVA and FVA metrics in terms of projections for Economic Capital and costs of funding. If implemented within the proper accounting framework, KVA/FVA mark-to-market leads to reporting rules for earnings which are both informative and useful to devise a sustainable strategy for dividend payments.

Keywords: KVA, FVA, OTC derivatives, CVA, counterparty credit risk

JEL Classification: G11, G12, G13

Suggested Citation

Albanese, Claudio and Caenazzo, Simone and Crépey, Stéphane, Capital and Funding (April 24, 2015). Available at SSRN: https://ssrn.com/abstract=2598527 or http://dx.doi.org/10.2139/ssrn.2598527

Claudio Albanese (Contact Author)

Global Valuation ( email )

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

Simone Caenazzo

Global Valuation Ltd ( email )

9 Devonshire Square
London, EC2M 4YF
United Kingdom

Stéphane Crépey

Université d'Évry - Equipe d'Analyse et Probabilites ( email )

Boulevard des Coquibus
F-91025 Evry Cedex
France

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