Bank Capital Structure, Valuation Adjustments and Financial Market Liquidity

Mario Cerrato and Shengfeng Mei

Working Papers from Business School - Economics, University of Glasgow

Abstract: Valuation adjustments (XVAs) to systemic US banks' derivatives portfolios - caused by swings in their own creditworthiness and that of their clients; for example, COVID-19 has had a significant impact on their revenues and, therefore, market intermediation. This paper studies the implications of funding value adjustments (FVA) on banks' equity holders. Indeed, it is important to understand this implication, as dealers work in the interests of their shareholders. Therefore, intermediation could result in impairment when that cannot be achieved due to friction. Our findings offer critical insights into how financial institutions navigate valuation adjustments and their impact on banks' balance sheets and discuss policy implications related to the main results.

Keywords: XVA; Banking; Financial Markets (search for similar items in EconPapers)
JEL-codes: E44 F31 G12 G21 G32 (search for similar items in EconPapers)
Date: 2025-01
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2025_07

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