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Abstract
The prevalent funding cost adjustment/funding benefit adjustment (FCA/FBA) accounting method is simple but controversial and has raised concerns about breakages of asset-liability symmetry, double counting of debt valuation adjustment, and embedding of entity-specific costs in exit prices. Additionally, it appears that the FCA/FBA method is interpreted quite differently from one bank to the next. In Albanese & Andersen, the authors proposed the funding valuation adjustment/funding debt adjustment accounting method as a compromise between financial asset valuation principles, "going-concern" accounting principles and regulatory capital requirements. Here, they review the key ideas of Albanese & Andersen and contrast it to FCA/FBA numerically and conceptually. They also consider certain risk management implications of funding cost accounting, and propose to use Common Equity Tier I Capital simulations as a tool for hedging, collateral optimisation and reverse stress testing. Finally, they consider strategies to exploit funding arbitrage by means of credit valuation adjustment reducing trades.