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Bank Capital Structure, Valuation Adjustments and Financial Market Liquidity

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  • Mario Cerrato
  • Shengfeng Mei

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.

Suggested Citation

  • Mario Cerrato & Shengfeng Mei, 2025. "Bank Capital Structure, Valuation Adjustments and Financial Market Liquidity," Working Papers 2025_07, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2025_07
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    References listed on IDEAS

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    2. He, Zhiguo & Nagel, Stefan & Song, Zhaogang, 2022. "Treasury inconvenience yields during the COVID-19 crisis," Journal of Financial Economics, Elsevier, vol. 143(1), pages 57-79.
    3. John Hull & Alan White, 2014. "Valuing Derivatives: Funding Value Adjustments and Fair Value," Financial Analysts Journal, Taylor & Francis Journals, vol. 70(3), pages 46-56, May.
    4. Darrell Duffie & Michael Fleming & Frank Keane & Claire Nelson & Or Shachar & Peter Van Tassel, 2023. "Dealer capacity and US Treasury market functionality," BIS Working Papers 1138, Bank for International Settlements.
    5. Leif Andersen & Darrell Duffie & Yang Song, 2019. "Funding Value Adjustments," Journal of Finance, American Finance Association, vol. 74(1), pages 145-192, February.
    6. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
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    More about this item

    Keywords

    XVA; Banking; Financial Markets;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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