Frans de Weert, "Bank and Insurance Capital Management"
Wi... | 2010-12-21 | ISBN: 0470664770 | 262 pages | PDF | 1 MB

This edition first published 2011
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2011 Frans de Weert
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ISBN 978-0-470-66477-3 (hardback), ISBN 978-0-470-97689-0 (ebk),
ISBN 978-0-470-97164-2 (ebk), ISBN 978-0-470-97163-5 (ebk),
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Preface xi
Acknowledgements xv
1 Capital Management as a Means to Create Value 1
1.1 The primary objectives of capital management 1
1.2 Optimization of capital structure 2
1.3 Optimization of performance 4
PART I: ACCOUNTING PERSPECTIVE 7
2 Bank and Insurance Business Model 9
2.1 Bank business model 9
2.2 Insurance business model 12
3 Balance Sheets of Banks and Insurance Companies 15
3.1 Bank balance sheet 15
3.2 Insurance balance sheet 18
3.3 Goodwill 20
4 Differences between Banking and Insurance 23
5 Economic Capital 25
6 Balance Sheet Management 31
6.1 Capital versus balance sheet management 31
6.2 Function versus departmental responsibilities 32
6.3 Capital hedging 36
6.4 Expected versus unexpected losses 37
6.5 Capital versus liquidity 39
6.6 Funds transfer price 39
6.7 Corporate line 40
7 Accounting versus Regulation 43
PART II: REGULATORY PERSPECTIVE 45
8 Types of Available Capital 47
8.1 Bank capital components 47
8.2 Insurance capital components 56
8.3 Determination of available capital for insurance
companies under Solvency II 58
8.4 Capital treatment of dated hybrids 61
8.5 Deduction of interests in other financial institutions 64
9 Capital Instruments 67
9.1 Common shares 67
9.2 Rights issue 68
9.3 Preference shares 70
9.4 Hybrid equity 71
9.5 Convertible capital instruments 73
10 Regulatory Capital Requirements 75
10.1 Bank capital requirement ratios 75
10.2 Ratio hedging against currency movements 78
10.3 The three-pillar approach to bank capital
requirements 79
10.4 Current capital requirements for insurance
companies 93
10.5 Upcoming capital requirements for insurance
companies: Solvency II framework 95
10.6 Liability side of the balance sheet under
Solvency II 97
10.7 Standardized approach Solvency II 102
11 Potential Changes in Capital Regulation 107
11.1 Regulational shift to core capital 107
11.2 Regulatory classification preference shares 110
11.3 Hybrid regulation 111
11.4 Subordinated debt for systemically relevant banks 115
11.5 Positive revaluation reserves 115
11.6 Minority interests 116
11.7 Deferred tax assets 117
11.8 Participations in other financial institutions 118
11.9 Leverage ratio limit 118
11.10 Financial autonomy 119
12 Reserve Adequacy Test 123
13 Materializing Diversification Benefits through Capital
Structures 125
14 Risk-Weighted Assets Optimization 131
15 Balance Sheet Analysis as Integral Part of Valuation 135
PART III: RISK AND CAPITAL MANAGEMENT
PERSPECTIVE 139
16 Investment of Capital and Balance Sheet Segmentation 141
16.1 Investment of capital for banks 141
16.2 Investment of capital for insurance companies 143
16.3 Investment of capital: duration differences for
banks and insurance companies 145
16.4 Segmentation of the balance sheet 146
17 Alignment between Risk and Capital Management 149
17.1 Where risk and capital management meet 149
17.2 Capital preservation as a key condition for
performance optimization 154
17.3 The soft side of capital management 157
17.4 Emerging role of risk and capital management 161
17.5 Critical success factors of risk and capital
management 163
17.6 Differences in risk management per line of
business 166
18 Risk-Adjusted Return on Capital and Economic Profit 171
19 Strategy, Risk, and Capital Management Cycle 177
PART IV: CORPORATE FINANCE PERSPECTIVE 181
20 Corporate Finance Decision Making 183
20.1 Role of RWAs in bank takeovers 183
20.2 Enterprise value versus market capitalization 185
20.3 Weighted average cost of capital and the optimal
level of debt financing 187
20.4 Financial institution equity valuation 191
20.5 Capital buy-backs 194
21 Strategic Diversification 199
22 Conclusions 207
22.1 Capital management perspectives 209
Appendix A: Accounting Classifications 213
Appendix B: Credit Ratings 215
Appendix C: Standardized Approach of Solvency II 217
C.1 Market Risk 217
C.2 Counterparty default risk 224
C.3 Life risk 224
C.4 Non-life risk 226
C.5 Health risk 228
C.6 BSCR 230
C.7 Operational risk 230
Bibliography 233
Index 235