FVA – what's wrong, and how to fix it
Claudio Albanese, of Global Valuation, and Leif Andersen, of Bank of America Merrill Lynch, expand on their new approach to calculating funding cost adjustment values, showing the inclusion of capital as a funding source can substantially shrink reported costs
It proved controversial when we wrote – in the February issue of Risk – that the most common way of calculating funding valuation adjustment (FVA) could lead to exaggerated writeoffs of net income. That was no surprise, given the industry had collectively taken losses in the multiple billions of dollars during 2013 and 2014.
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