FVA accounting, risk management and collateral trading
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
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