This article outlines a framework for the analysis of extreme events based on forward-looking reverse stress testing. We carry out a portfolio simulation and identify stress scenarios which are critical for bank solvency as the ones contributing the most to cost of capital, as expressed by KVA...

Performance assessment of derivative pricing models revolves around a comparative model-risk analysis. From among the plethora of econometrically unrealistic models, the ones that survive Darwinian selection tend to generate systematic short term profits while exposing the bank to long term...

Frontmatter -- Advance Praise for Reverse Stress Testing in Banking -- Acknowledgements -- Foreword -- Contents -- Part I: Fundamentals of Reverse Stress Testing -- 1 Reverse Stress Testing: A Versatile Thinking Tool -- 2 Reverse Stress Testing in Banks -- 3 Reverse Stress Testing: An Overview...

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...

By halting the LIBOR's publication, large volumes of fixed income securities, from loans to derivatives, will fall back to an alternative fixing reference. The initial proposal of a SOFR fallback eliminated any degree of subjectivity but opened up funding risk. Overlaying a credit spread over...

While the 2008 shifted the attention from individual trades to netting-set counterparty risk, the evolving 2020 storyline is driven by liquidity risk at the funding-set level. The COVID turmoil brings General Wrong Way Risk (GWWR) to the fore while the impending IBOR transition amplifies...

Abstract Based on an XVA analysis of centrally cleared derivative portfolios, we consider two capital and funding issues pertaining to the efficiency of the design of central counterparties (CCPs). First, we consider an organization of a clearing framework, whereby a CCP would also play the role...

Banking operations are being rewired around a pair of KVA/FVA metrics which quantify market incompleteness, i.e. the impossibility of perfect replication. The FVA is the cost of funding of debt liabilities while the KVA is the risk adjustment for equity liabilities, also called cost of capital....

In the aftermath of the 2007 global financial crisis, banks started reflecting into derivative pricing the cost of capital and collateral funding through XVA metrics. XVA is a catch-all acronym whereby X is replaced by a letter such as C for credit, D for debt, F for funding, K for capital and...