Bank and Insurance Capital Management (The Wiley Finance Series)

Bank and Insurance
Capital Management......Page 3
Contents......Page 9
Preface......Page 13
Acknowledgements......Page 17
1.1 The primary objectives of capital management......Page 19
1.2 Optimization of capital structure......Page 20
1.3 Optimization of performance......Page 22
PART I: ACCOUNTING PERSPECTIVE......Page 25
2.1 Bank business model......Page 27
2.2 Insurance business model......Page 30
3.1 Bank balance sheet......Page 33
3.2 Insurance balance sheet......Page 36
3.3 Goodwill......Page 38
4 Differences between Banking and Insurance......Page 41
5 Economic Capital......Page 43
6.1 Capital versus balance sheet management......Page 49
6.2 Function versus departmental responsibilities......Page 50
6.3 Capital hedging......Page 54
6.4 Expected versus unexpected losses......Page 55
6.6 Funds transfer price......Page 57
6.7 Corporate line......Page 58
7 Accounting versus Regulation......Page 61
PART II: REGULATORY PERSPECTIVE......Page 63
8.1 Bank capital components......Page 65
8.2 Insurance capital components......Page 74
8.3 Determination of available capital for insurance companies under Solvency II......Page 76
8.4 Capital treatment of dated hybrids......Page 80
8.5 Deduction of interests in other financial institutions......Page 82
9.1 Common shares......Page 85
9.2 Rights issue......Page 86
9.3 Preference shares......Page 88
9.4 Hybrid equity......Page 89
9.5 Convertible capital instruments......Page 91
10.1 Bank capital requirement ratios......Page 93
10.2 Ratio hedging against currency movements......Page 96
10.3 The three-pillar approach to bank capital requirements......Page 97
10.4 Current capital requirements for insurance companies......Page 111
10.5 Upcoming capital requirements for insurance companies: Solvency II framework......Page 113
10.6 Liability side of the balance sheet under Solvency II......Page 115
10.7 Standardized approach Solvency II......Page 120
11.1 Regulational shift to core capital......Page 125
11.2 Regulatory classification preference shares......Page 128
11.3 Hybrid regulation......Page 129
11.5 Positive revaluation reserves......Page 133
11.6 Minority interests......Page 134
11.7 Deferred tax assets......Page 135
11.9 Leverage ratio limit......Page 136
11.10 Financial autonomy......Page 137
12 Reserve Adequacy Test......Page 141
13 Materializing Diversification Benefits through Capital Structures......Page 143
14 Risk-Weighted Assets Optimization......Page 149
15 Balance Sheet Analysis as Integral Part of Valuation......Page 153
PART III: RISK AND CAPITAL MANAGEMENT PERSPECTIVE......Page 157
16.1 Investment of capital for banks......Page 159
16.2 Investment of capital for insurance companies......Page 161
16.3 Investment of capital: duration differences for banks and insurance companies......Page 163
16.4 Segmentation of the balance sheet......Page 164
17.1 Where risk and capital management meet......Page 167
17.2 Capital preservation as a key condition for performance optimization......Page 172
17.3 The soft side of capital management......Page 175
17.4 Emerging role of risk and capital management......Page 179
17.5 Critical success factors of risk and capital management......Page 181
17.6 Differences in risk management per line of business......Page 184
18 Risk-Adjusted Return on Capital and Economic Profit......Page 189
19 Strategy, Risk, and Capital Management Cycle......Page 195
PART IV: CORPORATE FINANCE PERSPECTIVE......Page 199
20.1 Role of RWAs in bank takeovers......Page 201
20.2 Enterprise value versus market capitalization......Page 203
20.3 Weighted average cost of capital and the optimal level of debt financing......Page 205
20.4 Financial institution equity valuation......Page 209
20.5 Capital buy-backs......Page 212
21 Strategic Diversification......Page 217
22 Conclusions......Page 225
22.1 Capital management perspectives......Page 227
Appendix A: Accounting Classifications......Page 231
Appendix B: Credit Ratings......Page 233
C.1 Market Risk......Page 235
C.3 Life risk......Page 242
C.4 Non-life risk......Page 244
C.5 Health risk......Page 246
C.7 Operational risk......Page 248
Bibliography......Page 251
Index......Page 253