Published: November 2014
Funding Risk cost adjustments implemented at most large Banks has been compromised by technology limitations for years. Inaccuracies in the modelling of collateral and economic capital lead to discrepancies in hedges and unintentional benefits to Banks. Global Valuation models have the scale and speed to properly model collateral behaviour.
We recently introduced the FVA/FDA accounting framework for funding costs, aiming to provide an accounting method that reasonably balances the, often conflicting, concerns of accountants, regulators, traders, and financial economists. While introduction of FVA/FDA accounting does not lead to write-offs of Net Income, regulatory capital measures and FTP policies are considerably different from those in funding-free accounting regimes. In this paper, we provide a concise comparison of FVA/FDA accounting with the FCA/FBA method currently endorsed by several large banks. We discuss detailed FTP policies, risk management implications, and quantify the notion of funding arbitrage.