Bank and Insurance Capital Management

by de Weert, Frans

• ISBN13: 9780470664773
• ISBN10: 0470664770
• Edition: 1st
• Format: Hardcover
• Copyright: 2010-12-13
• Publisher: Wiley

Summary

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

Preface	p. xi
Acknowledgements	p. xv
Capital Management as a Means to Create Value	p. 1
The primary objectives of capital management	p. 1
Optimization of capital structure	p. 2
Optimization of performance	p. 4
Accounting Perspective	p. 7
Bank and Insurance Business Model	p. 9
Bank business model	p. 9
Insurance business model	p. 12
Balance Sheets of Banks and Insurance Companies	p. 15
Bank balance sheet	p. 15
Insurance balance sheet	p. 18
Goodwill	p. 20
Differences between Banking and Insurance	p. 23
Economic Capital	p. 25
Balance Sheet Management	p. 31
Capital versus balance sheet management	p. 31
Function versus departmental responsibilities	p. 32
Capital hedging	p. 36
Expected versus unexpected losses	p. 37
Capital versus liquidity	p. 39
Funds transfer price	p. 39
Corporate line	p. 40
Accounting versus Regulation	p. 43
Regulatory Perspective	p. 45
Types of Available Capital	p. 47
Bank capital components	p. 47
Insurance capital components	p. 56
Determination of available capital for insurance companies under Solvency II	p. 58
Capital treatment of dated hybrids	p. 61
Deduction of interests in other financial institutions	p. 64
Capital Instruments	p. 67
Common shares	p. 67
Rights issue	p. 68
Preference shares	p. 70
Hybrid equity	p. 71
Convertible capital instruments	p. 73
Regulatory Capital Requirements	p. 75
Bank capital requirement ratios	p. 75
Ratio hedging against currency movements	p. 78
The three-pillar approach to bank capital requirements	p. 79
Current capital requirements for insurance companies	p. 93
Upcoming capital requirements for insurance companies: Solvency II framework	p. 95
Liability side of the balance sheet under Solvency II	p. 97
Standardized approach Solvency II	p. 102
Potential Changes in Capital Regulation	p. 107
Regulational shift to core capital	p. 107
Regulatory classification preference shares	p. 110
Hybrid regulation	p. 111
Subordinated debt for systemically relevant banks	p. 115
Positive revaluation reserves	p. 115
Minority interests	p. 116
Deferred tax assets	p. 117
Participations in other financial institutions	p. 118
Leverage ratio limit	p. 118
Financial autonomy	p. 119
Reserve Adequacy Test	p. 123
Materializing Diversification Benefits through Capital Structures	p. 125
Risk-Weighted Assets Optimization	p. 131
Balance Sheet Analysis as Integral Part of Valuation	p. 135
Risk and Capital Management Perspective	p. 139
Investment of Capital and Balance Sheet Segmentation	p. 141
Investment of capital for banks	p. 141
Investment of capital for insurance companies	p. 143
Investment of capital: duration differences for banks and insurance companies	p. 145
Segmentation of the balance sheet	p. 146
Alignment between Risk and Capital Management	p. 149
Where risk and capital management meet	p. 149
Capital preservation as a key condition for performance optimization	p. 154
The soft side of capital management	p. 157
Emerging role of risk and capital management	p. 161
Critical success factors of risk and capital management	p. 163
Differences in risk management per line of business	p. 166
Risk-Adjusted Return on Capital and Economic Profit	p. 171
Strategy, Risk, and Capital Management Cycle	p. 177
Corporate Finance Perspective	p. 181
Corporate Finance Decision Making	p. 183
Role of RWAs in bank takeovers	p. 183
Enterprise value versus market capitalization	p. 185
Weighted average cost of capital and the optimal level of debt financing	p. 187
Financial institution equity valuation	p. 191
Capital buy-backs	p. 194
Strategic Diversification	p. 199
Conclusions	p. 207
Capital management perspectives	p. 209
Accounting Classifications	p. 213
Credit Ratings	p. 215
Standardized Approach of Solvency II	p. 217
Market Risk	p. 217
Counterparty default risk	p. 224
Life risk	p. 224
Non-life risk	p. 226
Health risk	p. 228
BSCR	p. 230
Operational risk	p. 230
Bibliography	p. 233
Index	p. 235
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