Capital and Funding

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

See all articles by Claudio Albanese

Claudio Albanese

Global Valuation; CASS School of Business

Simone Caenazzo

Global Valuation Ltd

Stephane Crepey

Université d'Évry - Math Department

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 Crepey, Stephane, 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

CASS School of Business ( email )

106 Bunhill Row
London, England EC1Y 8TZ
United Kingdom

Simone Caenazzo

Global Valuation Ltd ( email )

9 Devonshire Square
London, EC2M 4YF
United Kingdom

Stephane Crepey

Université d'Évry - Math Department ( email )

Bd. François Mitterrand
F-91025 Evry Cedex, 91028
France

HOME PAGE: http://grozny.maths.univ-evry.fr/pages_perso/crepey/

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