Bank and Insurance Capital Management (The Wiley Finance Series)

In the aftermath of the financial crisis, capital management has become a critical factor in value creation for banks and other financial institutions. Although complex and subject to regulatory change, the strategic importance of capital management became apparent during the crisis and has moved the subject to the top of corporate agendas. Bank and Insurance Capital Management is an essential guide to help banks and insurance companies understand and manage their capital position. Bridging the gap between theory and practice, it provides proven techniques for managing bank capital, as well as explaining key capital management perspectives, including accounting, regulatory, risk and capital management and corporate finance. It also shows how to analyze a firm's stakeholders such as depositors, policy holders, debt holders and shareholders, and manage their expectations, and how to align risk and capital management so as to best optimize the return on capital and preserve capital in periods of stress. Economic capital is also discussed in depth, as are the practicalities of bank and insurance M&A, and the book also shows how financial innovations can be used to optimise the capital position and how diversification effects are reflected in the capital position. This book will arm readers with the knowledge and skills needed to understand how capital management can improve capital structure and performance, achieving an optimal cost of, and return on capital, creating value as a result. 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

In the aftermath of the financial crisis, capital management has become a critical factor in value creation for banks and other financial institutions. Although complex and subject to regulatory change, the strategic importance of capital management became apparent during the crisis and has moved the subject to the top of corporate agendas.

Bank and Insurance Capital Management is an essential guide to help banks and insurance companies understand and manage their capital position. Bridging the gap between theory and practice, it provides proven techniques for managing bank capital, as well as explaining key capital management perspectives, including accounting, regulatory, risk and capital management and corporate finance. It also shows how to analyze a firm's stakeholders such as depositors, policy holders, debt holders and shareholders, and manage their expectations, and how to align risk and capital management so as to best optimize the return on capital and preserve capital in periods of stress. Economic capital is also discussed in depth, as are the practicalities of bank and insurance M&A, and the book also shows how financial innovations can be used to optimise the capital position and how diversification effects are reflected in the capital position.

This book will arm readers with the knowledge and skills needed to understand how capital management can improve capital structure and performance, achieving an optimal cost of, and return on capital, creating value as a result.

"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"--Provided by publisher