FVA accounting, risk management and collateral trading

Albanese, Andersen and Iabichino present a method for accounting and risk managing FVAs

Frustrated man at the blackboard during a maths class

Claudio Albanese, Leif Andersen and Stefano Iabichino provide a concise comparison of funding valuation adjustment/funding debt adjustment accounting with the funding cost adjustment/funding benefit adjustment method currently endorsed by several large banks. They discuss funds transfer pricing policies, risk management implications, and quantify the notion of funding arbitrage

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The notion of charging for ‘funding costs'became painfully relevant for banks as their borrowing spreads jumped up during the financial crisis. Drawing inspiration from work by Piterbarg (2010) and Burgard & Kjaer (2011, 2013), several banks recently instituted accounting changes aimed at capturing the funding costs for uncollateralised derivatives transactions. The prevalent funding cost adjustment/funding benefit adjustment (FCA/FBA) accounting method is simple but controversial (see Cameron 2013) and has raised concerns about breakages of asset-liability symmetry, double counting of debt valuation adjustment (DVA), and embedding of entity-specific costs in exit prices. Additionally, it appears that the FCA/FBA method is interpreted quite differently from one bank to the next.

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