Bank and Insurance Capital Management

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  • Edition: 1st
  • Format: Hardcover
  • Copyright: 2010-12-13
  • Publisher: Wiley
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Supplemental Materials

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The current crisis has exposed the shocking truth that very few practitioners actually understand the capital positions of banks and insurance companies, let alone have good, tried and tested methods of evaluating their capital position. The subject of capital management is deemed to be difficult but this is mainly because of the lack of a good and transparent overview rather than the complexity of the subject. It is vital to have a very clear understanding of the regulatory environment in order to earn an optimal return on capital. This book provides proven techniques for managing bank capital as well as explaining each component such as balance sheets and type of capital in depth. The book will show how to minimise risk whilst still maximising value and will also, crucially provide the regulatory context and all latest developments. Economic capital will also be discussed in depth, as will the practicalities of bank and insurance M&A. The book will also show how financial innovations can be used to optimise the capital position and how diversification effects are reflected in the capital position.

Author Biography

FRANS DE WEERT is a mathematician by training with extensive research experience in quantitative finance. After his academic career he worked as an equity derivatives trader at Barclays Capital in London and New York. In his latest role he was responsible for the Latin American trading activities in equity derivatives. He subsequently moved on to become a strategy consultant at Booz & Company for which he advised senior management in the financial services industry. Currently Frans works as a banking and insurance supervisor and as an independent financial markets trainer. Frans has published several books on options trading and the banking and insurance sector and currently lives and works in Amsterdam.

For more author information please visit www.dftktrainings.com

Table of Contents

Prefacep. xi
Acknowledgementsp. xv
Capital Management as a Means to Create Valuep. 1
The primary objectives of capital managementp. 1
Optimization of capital structurep. 2
Optimization of performancep. 4
Accounting Perspectivep. 7
Bank and Insurance Business Modelp. 9
Bank business modelp. 9
Insurance business modelp. 12
Balance Sheets of Banks and Insurance Companiesp. 15
Bank balance sheetp. 15
Insurance balance sheetp. 18
Goodwillp. 20
Differences between Banking and Insurancep. 23
Economic Capitalp. 25
Balance Sheet Managementp. 31
Capital versus balance sheet managementp. 31
Function versus departmental responsibilitiesp. 32
Capital hedgingp. 36
Expected versus unexpected lossesp. 37
Capital versus liquidityp. 39
Funds transfer pricep. 39
Corporate linep. 40
Accounting versus Regulationp. 43
Regulatory Perspectivep. 45
Types of Available Capitalp. 47
Bank capital componentsp. 47
Insurance capital componentsp. 56
Determination of available capital for insurance companies under Solvency IIp. 58
Capital treatment of dated hybridsp. 61
Deduction of interests in other financial institutionsp. 64
Capital Instrumentsp. 67
Common sharesp. 67
Rights issuep. 68
Preference sharesp. 70
Hybrid equityp. 71
Convertible capital instrumentsp. 73
Regulatory Capital Requirementsp. 75
Bank capital requirement ratiosp. 75
Ratio hedging against currency movementsp. 78
The three-pillar approach to bank capital requirementsp. 79
Current capital requirements for insurance companiesp. 93
Upcoming capital requirements for insurance companies: Solvency II frameworkp. 95
Liability side of the balance sheet under Solvency IIp. 97
Standardized approach Solvency IIp. 102
Potential Changes in Capital Regulationp. 107
Regulational shift to core capitalp. 107
Regulatory classification preference sharesp. 110
Hybrid regulationp. 111
Subordinated debt for systemically relevant banksp. 115
Positive revaluation reservesp. 115
Minority interestsp. 116
Deferred tax assetsp. 117
Participations in other financial institutionsp. 118
Leverage ratio limitp. 118
Financial autonomyp. 119
Reserve Adequacy Testp. 123
Materializing Diversification Benefits through Capital Structuresp. 125
Risk-Weighted Assets Optimizationp. 131
Balance Sheet Analysis as Integral Part of Valuationp. 135
Risk and Capital Management Perspectivep. 139
Investment of Capital and Balance Sheet Segmentationp. 141
Investment of capital for banksp. 141
Investment of capital for insurance companiesp. 143
Investment of capital: duration differences for banks and insurance companiesp. 145
Segmentation of the balance sheetp. 146
Alignment between Risk and Capital Managementp. 149
Where risk and capital management meetp. 149
Capital preservation as a key condition for performance optimizationp. 154
The soft side of capital managementp. 157
Emerging role of risk and capital managementp. 161
Critical success factors of risk and capital managementp. 163
Differences in risk management per line of businessp. 166
Risk-Adjusted Return on Capital and Economic Profitp. 171
Strategy, Risk, and Capital Management Cyclep. 177
Corporate Finance Perspectivep. 181
Corporate Finance Decision Makingp. 183
Role of RWAs in bank takeoversp. 183
Enterprise value versus market capitalizationp. 185
Weighted average cost of capital and the optimal level of debt financingp. 187
Financial institution equity valuationp. 191
Capital buy-backsp. 194
Strategic Diversificationp. 199
Conclusionsp. 207
Capital management perspectivesp. 209
Accounting Classificationsp. 213
Credit Ratingsp. 215
Standardized Approach of Solvency IIp. 217
Market Riskp. 217
Counterparty default riskp. 224
Life riskp. 224
Non-life riskp. 226
Health riskp. 228
BSCRp. 230
Operational riskp. 230
Bibliographyp. 233
Indexp. 235
Table of Contents provided by Ingram. All Rights Reserved.

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