Capital and Funding

Claudio Albanese (1) , Simone Caenazzo , Stéphane Crépey (2)

1 CASS Business School - London, UK
2 LaMME - Laboratoire de Mathématiques et Modélisation d'Evry

Banking operations are being rewired around XVA metrics quantifying market incompleteness. This paper focuses on the cost of funding of variation margin and the cost of capital, i.e. FVA and KVA. The two metrics are intertwined since economic capital is itself a source of funding. Accurate valuations require simulations of capital and funding costs. Motivated by Basel Pillar II, Solvency II and IFRS 4 Phase II, we propose a principled approach to accounting regulatory treatments for FVA and KVA.

Domaines: Finance quantitative [q-fin.CP]

Claudio Albanese, Simone Caenazzo, Stéphane Crépey. Capital and Funding. 2018. ⟨hal-01764401⟩