Analysis of Financial Companies Flashcards
What are the three main Basel III requirements for banks?
- minimum capital requirement: equity / risk-weighted assets
- minimum liquidity requirement: a bank must hold enough high quiality liquid assets to cover liquidity needs in a 30-day liquidity stress scenario
- minimum amount of stable funding to cover liquidity needs over one-year horizon
What are the elements of CAMELS analysis approach?
capital adequacy, asset quality, management capabilities, earnings sufficiency, liquidity position, sensitivity to market risk.
What is included in Common Equity Tier 1 capital?
common stock; retained earnings; accumulated OCI; adjustments, including deduction of intangible assets; deferred tax assets.
What is included in Other Tier 1 capital?
deposits and other debt obligations, that do not have fixed maturity and do not have any type of payment of dividends or interest that is not totally at discretion of the bank.
What is included in Tier 2 capital
instruments subordinate to depositors and other creditors that have a minimum maturity of five years.
What are the Tier 1 and Tier 2 capital requirements?
Common Equity Tier 1: >= 4.5% of RWA
Total Tier 1: >= 6% of RWA
Total Tier 1 and Tier 2: >= 8% of RWA
On what basis loans are measured on a balance sheet?
loans are measured at amortized cost and shown on BS net of allowances for loan losses.
How securities are measured under IFRS and GAAP?
Under IFRS - eithrer amortized cost, FVPL, or FVOCI is used
Under GAAP: debt securities are treated according to their classification:
held to maturity: amortized cost
trading: FVPL
available for sale: FVOCI
The three levels of fair value estimation hierarchy
1: inputs are quoted prices for identical instruments.
2: iinputs are observable but not quoted for identical instruments.
3: inputs are unobservable and at least partially subjective
Basel III liquidity requirements
Liquidity coverage ratio: highly liquid assets / expected cash outflows over one month; target LCR >= 100%
Net stable funding ratio: available stable funding / required stable funding (1-year); target NSFR >= 100%
Non-CAMELS factors
government ownership; government support; mission; corporate culture; competitive environment; off-balance-sheet items; segment information; currency exposure; risk factors; Basel III disclosures.
Combined ratio
underwriting loss raio = [claims paid + change in loss reserves] / net premiums earned
expense ratio = [underwriting expenses] / net premiums written
combined ratio = underwriting loss ratio + expense ratio
underwriting loss ratio = loss and loss adjustment expense ratio
Why is the current ratio not directly applicable to L&H insurance companies?
Their balance sheets often do not include the classifications ‘current’ and ‘non-current’
In the context of insurance companies, what is the float earnigns?
amounts collected as earnigns but not yet paid out as benefits
