Bank and insurance Capital management

Insurance , cash services & payday loans
Bank and insurance
Capital management

Extrait :
More than in any other industry, capital is an integral part of the business
model of banks and insurance companies. For most industries, capital
and (subordinated) debt are merely used to acquire the assets necessary
to run a certain business model. In other words, the business model of
most companies is not a function of its liabilities ( cash services & payday loans ), but rather of its assets in
combination with intangible assets that do not show up on the balance
sheet (e.g. intellectual property, human capital, distribution network,
partners). For banks and insurance companies, the non-capital part of
the liability side of their balance sheets, which comprises deposits and
insurance provisions respectively, are integral to their business model.
These liabilities are used to acquire assets. Banks and insurance com-
panies aim to earn a positive spread on what they pay on their liabilities
and the income they receive on their assets. One of the most basic rules
in finance is that one cannot earn additional yield without running risks.
Therefore, a financial institution needs to have enough of a buffer to
absorb losses should unexpected risks materialize. This is exactly the
function of capital for a financial institution; i.e. to provide a cushion
for unexpected losses related to the risks that are taken. The larger and
more material the risks, the larger the required capital position. Hence,
the capital position is a function of the risks and therefore an integral
part of the business model of a financial institution.

Format : [ PDF ]
Taille : 1.5 MB
Langue : anglais



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