The black art of FVA, part III: a $4 billion mistake?
A new approach to funding valuation adjustment has emerged, offering huge savings on the framework that has now been adopted by almost 30 banks. Its appearance implies losses have been overstated and customers are paying too much
A $6.2 billion loss that 24 banks have collectively racked up since the end of 2012 may have been a mistake, new thinking suggests – it should never have been reported as a loss, and should have been smaller. Perhaps by as much as $4 billion.
Those are the startling conclusions of three quants, who published their work in Risk earlier this year (Risk February 2015). They argue funding valuation adjustment (FVA) – the costs and benefits arising when uncollateralised derivatives are hedged with
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