Looking for a job in banking? As we very correctly predicted in November, it will help if you familiarize yourself with the concept of funding valuation adjustment (FVA).
FVA made an important appearance in JPMorgan’s fourth quarter results, announced today. Until combined adjustments for FVA and debt valuation (DVA) were added to results for the quarter, JPMorgan did quite well. However, JPMorgan registered a $1.5bn FVA cost in the fourth quarter. Once combined DVA and FVA were factored in, the bank did incredibly badly – return on equity fell to a mere 6% in the corporate and investment bank and costs there rose to 81% of revenues.
So, what is FVA exactly? JPMorgan felt compelled to add an entire slide on the subject to its presentation today. We have embedded this below. Put simply, FVA is the present value cost of funding derivatives over their entire life-cycle. This cost is reportedly now being incorporated into traders’ P&L.
Recruiters say an understanding of FVA is due to become a big deal in 2014. JPMorgan’s results suggest they’re right.