Bank and Insurance Capital Management

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

Preface. Acknowledgements. 1 Capital Management as a Means to Create Value. 1.1 The primary objectives of capital management. 1.2 Optimization of capital structure. 1.3 Optimization of performance. PART I: ACCOUNTING PERSPECTIVE. 2 Bank and Insurance Business Model. 2.1 Bank business model. 2.2 Insurance business model. 3 Balance Sheets of Banks and Insurance Companies. 3.1 Bank balance sheet. 3.2 Insurance balance sheet. 3.3 Goodwill. 4 Differences between Banking and Insurance. 5 Economic Capital. 6 Balance Sheet Management. 6.1 Capital versus balance sheet management. 6.2 Function versus departmental responsibilities. 6.3 Capital hedging. 6.4 Expected versus unexpected losses. 6.5 Capital versus liquidity. 6.6 Funds transfer price. 6.7 Corporate line. 7 Accounting versus Regulation. PART II: REGULATORY PERSPECTIVE. 8 Types of Available Capital. 8.1 Bank capital components. 8.2 Insurance capital components. 8.3 Determination of available capital for insurance companies under Solvency II. 8.4 Capital treatment of dated hybrids. 8.5 Deduction of interests in other financial institutions. 9 Capital Instruments. 9.1 Common shares. 9.2 Rights issue. 9.3 Preference shares. 9.4 Hybrid equity. 9.5 Convertible capital instruments. 10 Regulatory Capital Requirements. 10.1 Bank capital requirement ratios. 10.2 Ratio hedging against currency movements. 10.3 The three-pillar approach to bank capital requirements. 10.4 Current capital requirements for insurance companies. 10.5 Upcoming capital requirements for insurance companies: Solvency II framework. 10.6 Liability side of the balance sheet under Solvency II. 10.7 Standardized approach Solvency II. 11 Potential Changes in Capital Regulation. 11.1 Regulational shift to core capital. 11.2 Regulatory classification preference shares. 11.3 Hybrid regulation. 11.4 Subordinated debt for systemically relevant banks. 11.5 Positive revaluation reserves. 11.6 Minority interests. 11.7 Deferred tax assets. 11.8 Participations in other financial institutions. 11.9 Leverage ratio limit. 11.10 Financial autonomy. 12 Reserve Adequacy Test. 13 Materializing Diversification Benefits through Capital Structures. 14 Risk-Weighted Assets Optimization. 15 Balance Sheet Analysis as Integral Part of Valuation. PART III: RISK AND CAPITAL MANAGEMENT PERSPECTIVE. 16 Investment of Capital and Balance Sheet Segmentation. 16.1 Investment of capital for banks. 16.2 Investment of capital for insurance companies. 16.3 Investment of capital: duration differences for banks and insurance companies. 16.4 Segmentation of the balance sheet. 17 Alignment between Risk and Capital Management. 17.1 Where risk and capital management meet. 17.2 Capital preservation as a key condition for performance optimization. 17.3 The soft side of capital management. 17.4 Emerging role of risk and capital management. 17.5 Critical success factors of risk and capital management. 17.6 Differences in risk management per line of business. 18 Risk-Adjusted Return on Capital and Economic Profit. 19 Strategy, Risk, and Capital Management Cycle. PART IV: CORPORATE FINANCE PERSPECTIVE. 20 Corporate Finance Decision Making. 20.1 Role of RWAs in bank takeovers. 20.2 Enterprise value versus market capitalization. 20.3 Weighted average cost of capital and the optimal level of debt financing. 20.4 Financial institution equity valuation. 20.5 Capital buy-backs. 21 Strategic Diversification. 22 Conclusions. 22.1 Capital management perspectives. Appendix A: Accounting Classifications. Appendix B: Credit Ratings. Appendix C: Standardized Approach of Solvency II. C.1 Market Risk. C.2 Counterparty default risk. C.3 Life risk. C.4 Non-life risk. C.5 Health risk. C.6 BSCR. C.7 Operational risk. Bibliography. Index.