of crisis is shown to be endogenous to the model’s operation,
because of systemic fragility. The focus is on bank balance
sheet fragility that is caused by bad capital driving out
good capital, banks reaching for yield and the inversion of
the yield curve. It is argued that not having FVA profits in
bank capital during booms is an essential control mechanism
that inhibits the feedback effects emanating from
the real sector.
An empirical example is given where the evolution of
the unrealised FVA gains through profit and loss of two
universal and systemic banks (ING Bank N.V & the Standard
Bank of South Africa) can be better understood using
the model in this paper.