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  • SVA represents the economic profit generated by a firm, taking into account both income and capital usage A firm’s market value can be viewed as equal to its book value plus the present value of future SVA. Growth in share price is dependent on growth in SVA
  • Traditionally, commercial banks have run a lend & hold model At inception, decision whether this credit is a viable business prop. Decision not always taken on (standalone) economics No management after inception (except) default [BUILD] Now trend towards active management Origination of credit from customers of the firm, transferred at economically viable price to the portfolio management unit PFM warehouses & manages the credit, potentially spices it up and repackages it The eventual goal is to distribute the loan(s) to investors (NB. Even though sometimes there might be a decision to hold the loan rather than distribute it) [BUILD] Key parameters are again...
  • Traditionally, commercial banks have run a lend & hold model At inception, decision whether this credit is a viable business prop. Decision not always taken on (standalone) economics No management after inception (except) default [BUILD] Now trend towards active management Origination of credit from customers of the firm, transferred at economically viable price to the portfolio management unit PFM warehouses & manages the credit, potentially spices it up and repackages it The eventual goal is to distribute the loan(s) to investors (NB. Even though sometimes there might be a decision to hold the loan rather than distribute it) [BUILD] Key parameters are again...

026550-001 N O V E M B E R 2 0 0 5 Presentation Transcript

  • 1. N   O   V   E   M   B   E   R     2   0   0   5 B   A   S   E   L     I   I     A   N   D     S   T   R   A   T   E   G   I   C     B   A   L   A   N   C   E     S   H   E   E   T     M   A   N   A   G   E   M   E   N   T
  • 2. Executive summary
      • With BIS 2 changing the way in which banks view risk, there is a greater focus on “economic” performance rather than previously used “accounting” measures of performance
      • Maximizing shareholder value requires not just a focus on returns, but a focus on the risk taken in generating those returns, to assess whether it exceeds the cost of required capital
      • Viewing risks on an “economic”, rather than “regulatory” or “accounting” basis, provides banks with a common measure with which to compare contribution to shareholder value (SVA) from competing asset classes
      • Importantly, SVA links risks and returns in a direct and quantifiable manner which will allow managers at all levels of the firm to make more informed choices on the allocation of scarce capital resources
      • JPMorgan is pleased to share some of our key experiences in how a bank can apply such a holistic balance sheet management framework to achieve strategic objectives
    1
  • 3. Implications of Basel II 2 I   B   A
  • 4. Basel II has led to reevaluation of capital framework across the world "Basel II will provide one of the biggest structural shocks to the banking industry for decades. Is the industry ready?" Mercer Oliver Wyman, Dec 2003 Capital framework Advanced Rudimentary Basel I Basel II Economic capital
      • More closely aligns regulatory capital with economic risks
    • Standardized
      • Distinguishes capital charge by asset quality based on rating agency scoring
      • External ratings correspond to PD
    • Internal Ratings Based
      • Foundation: Allows banks to estimate PD while LGD and EAD are provided
      • Advanced: Allows banks to estimate PD, LGD and EAD
      • BIS II doesn't address concentration risk explicitly
        • Single name, industry, country
      • Economic capital framework based on internal models
        • PD, LGD, EAD
        • Maturity, correlation
        • Spread migration
      • Does not rely on calibration established by regulator, i.e., not average risk
      • Static risk weights based on asset type, i.e., sovereign, banks, corp, etc.
      • No distinction within risk weighting bands for asset quality
        • "One size fits all"
      • Amendment ('97) allows for use of VaR to estimate market risk
      • However, measurement of credit risk remains rudimentary
      • Does not distinguish between market, credit or operational risk per se
    3
  • 5. The Three Pillars of Basel II Pillar 1 Pillar 2 Pillar 3 Requirements for calculation of regulatory capital Supervisor’s Role Disclosure requirements
      • Use of rating, loss exposure and risk mitigation
      • Explicit requirement for operational risk capital
      • Banks to assess solvency relative to risk
      • Supervisory review of risk management and capital practices
      • Greater disclosure of risk profile, capital structure and risk management practices
      • Quantitative aspects critical for capital calculations
      • Fresh look at control practices
      • Solvency assessment covers ALL risks
      • Application of supervisor judgement critical
      • Improved transparency
      • Expectations
      • Consistency with accounting and local regulatory requirements
    4
  • 6. Risk Management sophistication tends to improve shareholder value generating ability of banks Standardized IRB foundation IRB advanced Maximize Shareholder Value Ensure Earnings stability Economic capital Control Losses Small/local banks Mid size/regional banks Large global banks Risk management sophistication Capabilities of the Bank Lend & Hold Lend & Hold with Hedging Active portfolio management/ distribution of risk 5
  • 7. Net sector impact is expected to be neutral, however balance sheet composition will determine outcome Risk weights by asset class 1
  • 8. Asian banks face the following balance sheet challenges
      • Credit concentration risk
        • Majority of credit exposures tend to be concentrated within the domestic environment
        • Significant exposures concentrated in the middle to lower rated credit grades
        • Industry diversification is limited to the industries available domestically
      • Increased competition in domestic lending opportunities resulting in diminishing returns: The more attractive segments from a risk adjusted point of view will be main targets for banks potentially resulting in margin compression, i.e. retail and SME lending
      • Relative low risk adjusted returns of domestic lending opportunities: Significant part of existing domestic lending opportunities may have low risk adjusted returns, e.g. Corporate lending
    Challenges Needs
      • Ability to diversify and improve overall portfolio composition
      • Flexibility to select asset classes with risk adjusted returns commensurate with the bank’s strategy without having to compete
    7
  • 9. BIS II may render a number of valuation and strategic implications, giving rise to balance sheet repositioning needs Valuation Strategic
      • Markets will begin to factor in capital structure modification requirements
      • Focus on return on capital will increase as returns and risks can be more closely followed by the investing community
      • Justifying low return on capital business segments may be required
      • Need to continue focus on fee income
      • Managing historic relationships in light of need to reprice low profitability credits
      • Greater competition already being felt in higher risk adjusted return businesses—consumer
      • Higher stock valuations arising from better risk adjusted performance will better position some for expansion through acquisition
      • Larger groups will be able to pool resources to better fund IRB transition
      • Need to focus on risk adjusted returns will more clearly highlight benefits of some asset classes over others
      • Greater need to deploy excess liquidity in most risk adjusted profitably way, while also generating meaningful profit growth
    Balance sheet repositioning implications 8
  • 10. Strategic importance 9 I   B   A
  • 11. There will likely be a greater alignment of risk and reward as banks increasingly focus on economic as opposed to accounting profits
      • If A - B is positive , the bank makes a profit , but may not improve shareholder value
      • If A - B is bigger than C , the bank improves shareholder value (SVA positive)
      • Therefore to improve SVA, the bank must:
        • Improve yield on assets at current risk level
        • Reduce cost of funding assets without increasing ALM risks
        • Reduce the current risk level (capital) without reducing return, or lower cost of regulatory capital
    The income generated on an asset depends on the interest rate and fees charged The cost of funding the assets depends on the mix of instruments used The amount of capital depends on the riskiness of the assets and the cost of capital depends on the mix Assets Liabilities & Capital Interest and fee income Interest, Provisions& operating expense A B Cost of capital C 10
  • 12. Shareholder value added provides the framework to align incentives across the entire bank … ¹ Includes charge for expected loss Value drivers   minus Market capitalization Franchise value (discounted future SVA) Equity at risk Cost of equity Share price Capital charge Risk adjusted operating profits + Single performance measure aligning various interests of employees, management and shareholders Management process Asset allocation ALM Risk management Capital management = = Risk adjusted asset yield 1 Liquidity funding Financial value (book value)  Shareholder Value Added 11
  • 13. … and allows banks to evaluate risks and returns at every level of the company Bank Credit portfolio Business division Individual transaction
      • Return on economic capital of whole firm
      • Incorporates diversification benefits of combined business portfolio
      • Compare returns on economic capital of individual business units
      • Determine optimal areas to invest additional capital
      • Identify single name and industry concentration issues within a portfolio
      • Optimal reinvestment strategies
      • Price individual deals / customer relationship
      • Determine return of individual products
      • Prioritize products for use of client capital limits
    Individual customer 12
  • 14. Interrelated nature of each process requires issues to be addressed in totality at the most senior level
    • Ensure economic capital is accurately measured and efficiently allocated
      • Assess current calculation methodology
      • Suggest refinements to current model
    • Structure liabilities to match and support asset base with the lowest funding cost available
      • Measure current ALM position
      • Develop strategies to improve efficiency
    Minimize(liquidity cost) Constraints (assets) Maximize(asset yield) Constraints (risk level) Minimize(risk level) Constraints (asset yield) Minimize(capital cost) Constraints (risk level)
    • Increase yield on the asset portfolio without increasing risk or decrease risk on the asset portfolio without reducing return
      • Identify positive and negative SVA loans
      • Develop alternative asset strategies
    Assets SVA Maximization ALM Economic capital
    • Determine most efficient mix of capital to ensure the lowest cost
      • Establish target credit rating
      • Develop strategies to improve capital mix
      • Hold capital commensurate with risks
    Capital management 13
  • 15. The balance sheet management framework enables identification of value creation opportunities
    • Cash securitization
      • In addition to providing term funding, securitization can release capital by reducing RWA
    • Synthetic securitization
      • Releases capital via a synthetic transfer of risk using credit derivatives (reduces RWA)
    • REIT
      • Sale and lease back of land & buildings can result in a gain in Tier 1, and a reduction in RWA
    • Equity
      • Increase Tier 1 equity capital via a single strategic partnership or group of financial investors
    • Hybrid capital
      • Perpetual instruments can replicate many features of equity, while offering lower cost and tax-efficiency
    • Subordinated debt
      • Subordinated debt offers a very efficient means of achieving target CAR objectives while limiting cost
    Asset alternatives Capital alternatives
      • Gross Loans
        • Large Corp.
        • SME
        • Consumer
      • NPL
      • Securities
      • Land and buildings
      • Fixed Assets
    Assets
      • Deposits
      • Short-term borrowing
      • Term borrowing
      • Other
    Liabilities
      • Equity
      • Hybrid Tier 1
      • Tier 2
    Capital
      • Due to the leveraged nature of a bank’s balance sheet, liability-side solutions support significantly greater capacity than asset-side alternatives
      • Example
        • For every $1 of capital raised, a bank can lend $12.5 of RWA
        • For every $1 of RWA reduce, a bank releases $0.08 capital
    14
  • 16. For most banks, asset allocation and capital management are the most relevant opportunities to enhance shareholder value
      • Cash
      • Short term
      • Fixed income
      • Gross Loans
        • Large Corp
        • SME
        • Consumer
    Assets
      • Deposits
      • Short-term borrowing
      • Borrowings
      • Foreign currency deposits
      • Foreign currency borrowings
      • Long Term Borrowing
    Liabilities Capital
      • Equity
      • Hybrid Tier I
      • Tier II
      • Tier 3
    Capital Mgt. 2 ALM 3 1 Asset Allocation
    • Asset strategies
      • Aim to improve risk adjusted returns by diversifying domestic exposure through investing in international investment grade exposures
    • Capital strategies
      • Supplement Core Tier I with cost effective Tier II capital to support growth
    15
  • 17. Balance sheet management 16 I   B   A
  • 18. Principles of economic capital management
      • Solvency —the most important principal is to ensure there is a sufficient equity buffer at all times to cover unexpected losses experienced in the course of business
      • While maintaining solvency, it is necessary to strike a balance between meeting expectations from stakeholders and the external environment
        • Regulators
        • Bond Holders
        • Depositors
        • Shareholders
        • Rating agencies
        • Analysts
      • After determining economic capital needs, optimize capital structure by selection of available capital instruments to minimize cost of regulatory capital (subject to meeting various regulatory and external expectations)
      • Manage shareholder value
        • Improve economic performance of the bank as benchmarked by return On equity, risk adjusted return on capital and shareholder value added
    • External stakeholders perspective on equity
      • Emphasis on bank’s debt servicing capacity
      • Need banks to maintain large equity base to absorb potential economic losses
    • Shareholders perspective on equity
      • Emphasis on the bank’s ability to generate returns on the shareholder’s funds
      • Need banks to maintain minimal level of equity base
    Investors   Regulators Rating agencies Shareholder returns Capital 17
  • 19. Banks have actively used non-dilutive capital to bridge the difference between economic requirements and target CAR Other balance sheet management techniques have also been used by international banks, which will be explained in more detail in the following sections DBS Group capital ratios HSBC Plc capital ratios Standard Chartered Plc capital ratios
      • HSBC seeks to maintain a prudent balance between the different types of capital
      • With the advantage of higher returns using leverage, it uses a 8.25% Tier I benchmark for its long-term capital planning
      • It has also made use of innovative Hybrid Tier I capital
    Chinatrust Commercial Bank capital ratios
      • Post the SE Asian crisis Chinatrust has raised Tier I capital to shore up capital adequacy
      • With reduced levels of subordinated capital after 1998, it recently issued US$500mm of UT II capital in the form of perpetual preference shares
    ¹ Current rating, post-upgrade on 10 Jul, ’05 Source: Company reports, Central Bank website
      • DBS has actively managed its capital structure
      • MAS guidelines have changed from a minimum Tier 1 ratio of above 10% to now a minimum of 7%
      • DBS has made use of Hybrid Tier 1 capital as well as Upper Tier 2 to boost its capital adequacy
      • The capital policy is to maintain a Tier I ratio of 7—9% and CAR of 12—14%
      • Its aggressive use of Tier II capital, going to limits of 50%, has resulted in high return on equity for its shareholders
      • It has further improved returns and capital adequacy through the issue of innovative Hybrid Tier I capital
    ¹ Current rating, post-upgrade on 10 Jul, ’05 18 A+ AA-¹ BBB+ BBB A- A A+ AA-¹ BBB+ BBB A- A A+ AA- ¹ BBB+ BBB A- A A+ AA- ¹ BBB+ BBB A- A
  • 20. Economic capital estimates are driven based on the asset quality composition of the bank’s credit portfolio Breakdown of Wholesale portfolio by industry (% of notional) Assumed credit rating distribution of loan portfolio JPMorgan estimated the credit economic capital of the loan portfolio needs at a range of target ratings for a 1 year horizon (% of notional exposure) Target credit rating for hypothetical bank Based on JPMorgan internal capital model Hypothetical distribution for illustrative bank Based on hypothetical portfolio and JPM assumptions on remainder of loan portfolio 19
  • 21. Economic capital requirements vary depending on the overall asset quality of the industry segments Economic Capital requirements for a hypothetical bank with a large corporate loan portfolio (% of Notional) Hypothetical corporate bank portfolio, based on JPMorgan internal capital model; LGD assumed to be 70%
      • Although capital requirement of BIS is 8% for each risk asset, economic capital requirements can differ significantly
      • Hypothetically, a diversified corporate loan portfolio may contain different capital requirements for different sectors
        • For example, the transport and logistics segment has significant economic capital requirements resulting in significant capital charges (as you would have to hold 21.7% in equity for each dollar you lend to this segment)
        • For example, risk pricing for the abovementioned segment would be significantly higher than the risk pricing for petrochemicals, which only require 4.3% economic capital
    BIS 8% requirement 20
  • 22. The traditional business model for banks results in balance sheets that are relatively static Extend credits Hold to maturity Extend credits to existing customers—overtime, top accounts receive most credits Overtime, concentration builds up (industry, geography, single names) Gather deposits A typical bank’s deposit franchise provides low cost funds Potential portfolio concentration Geography Industry Single name Note: Industry and geographic concentration based on hypothetical Asian bank portfolio ~ ~ 21
  • 23. During unpredictable and adverse business cycles, banks could suffer from concentration risks Source: Hypothetical bank data NPL ratio Provisions/loans Manifestation of concentration risk Average in Asia 22
  • 24. In recognition of such risks, banks have begun to shift towards a more dynamic business model Deploy capital in the most efficient manner possible Maximize risk adjusted returns Distribute risk Structured investments portfolio, M&A, distribute to shareholders, etc. Package risk and sell through capital markets, free up capital Originate/ acquire customer Manage/ warehouse risk Decision to lend based on total value of client, bundle products Lending and risk taking decisions delinked, warehouse if necessary Redeploy capital “ Today, credit distress in banks can be traced predominantly to one factor : under-diversification in corporation credit portfolios. Notably, a bank’s risk adjusted profitability is materially influenced by its corporate-credit portfolio’s state of diversification, because diversification has the power to reduce risk without diminishing expected returns.” Standard & Poor's Capital turnover Diversify risk 23
  • 25. Diversification reduces concentration and volatility, allowing a bank to take risk efficiently Illustration: Scenario II
      • Depending on risk of (i) existing portfolio and (ii) investment, final portfolio may be different
        • Scenario I: total risk is 140
        • Scenario II: total risk is 115
      • Impact of risk concentration increases risk profile
      • Scenario II adds diversified risk minimizing total risk
    Illustration: Scenario I 115 140 Risk level Concentration premium Standalone investment risk Concentration Capital at risk Capital at risk 24
  • 26. Balance sheet management case study 25 I   B   A
  • 27. JPMorgan assisted a leading Korean Bank in its balance sheet optimization initiative ¹ Cost of equity
      • The objective of the assignment was to develop strategies for improving shareholder value
      • JPMorgan used the current composition of the balance sheet as a starting point and SVA (“Shareholder Value Added”) methodology as our framework
    • Increase yield on the asset portfolio without increasing risk or decrease risk on the asset portfolio without reducing return
      • Identify positive and negative SVA loans
      • Develop alternative asset strategies
    Asset allocation
    • Determine most efficient mix of capital to ensure the lowest cost
      • Measure current cost of regulatory capital at the bank
      • Develop strategies to improve the mix
    Capital management
    • Accurately measure the risk in the balance sheet
      • Involves determination of the quantum of economic capital
      • Insights into model for allocating risk-weightings as per BIS II
    Risk assessment SVA = Operating profit - (required capital x capital cost¹) Management process SVA determinants Asset allocation Liquidity management (ALM) Capital management Risk management Asset yield Liquidity funding Risk level Capital funding   
    • Structure liabilities to match and support asset base y with the lowest funding cost available
      • Measure current ALM position
      • Develop strategies to improve efficiency
    ALM The project was divided into 4 sections driven by the SVA formula 26
  • 28. Asset allocation
      • Identify asset that would help the bank:
        • Reducing negative SVA
        • Earn higher return on capital
        • Diversify its loan portfolio
    Objective JPMorgan solution Category Asset allocation
      • Improve the risk/return profile of asset portfolio by
        • Sell exposure to low SVA and highly concentrated exposures, while invest excess economic capital in SVA positive assets
        • Increase global credit exposure to improve margins and diversification by investing in global portfolio
      • Consider hedging some negative SVA assets via synthetic securitization
      • Synthetic securitization is the most cost-effective method to execute the strategic transformation of the bank’s asset portfolio
      • Execute transformation of the bank’s asset portfolio
    28 New assets Return on Capital + 58.9% SVA contribution + 45.5% Return on Capital + 58.9% SVA contribution + 45.5% Existing assets Return on Capital + 2.5% SVA contribution - 10.9% 2. Return on Capital SVA contribution 1. Fitch Industry breakdown Regional breakdown Fitch industry breakdown for “Others” Portfolio overview Industry stratification
      • Portfolio Notional: KRW2,550bn
      • No of Obligors
      • Number of Unique Borrowers
      • Number of Unique Chaebols
    Chaebol stratification Domestic rating stratification (%) 18.06 41.89 40.05 AA A BBB BB B Textile-tree- paper & others Fishery & food manufacturing Finance First metal industry Construction Compound & nonmetal Metal & Machinery Wholesale & transportation storage Daelim Samsung SK Daewoo Doosan Hanjin Lotte LG Curitel CJ Hyundai Hyundai Motor Tong Yang Unaffiliated
  • 29. SVA analysis of existing portfolio 29 ROC by industry sector 186 203 162 185 161 149 140 120 100 74 63 48 45 25 23 21 21 20 (20.0)% (10.0)% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 0 5 10 15 20 25 Customer categories by exposure size (US$mm) ROC % Cost of capital Wholesale & Transport (small co) Wholesale & Transport (large corp ) Wholesale & Transport (SME) Assembly (large corp ) Construction (SME) Compound & Nonmetal (large corp ) Assembly (SME) Construction (small co) Wholesale & Transport (public) Textile (SME) Construction (large corp ) Compound & Nonmetal (SME) Fishery (large corp ) Textile (large corp ) Assembly (small co) 1st Metal (large corp ) Fishery (SME) Textile (small co) Positive SVA Negative SVA
  • 30. Efficient frontier Return Risk High SVA Low SVA Current position Bank X’s asset portfolio Step 2: Investing in alternative assets Improvement in SVA of asset portfolio by reducing capital at risk and increasing return of capital Efficient frontier Step 2 stand-alone: Investing in alternative assets only 30 Step 1: Hedging negative SVA and high concentration exposures
  • 31. Capital management Objective JPMorgan solution Category Capital management
      • In achieving target ratios beyond core economic capital requirements, the bank should seek to maintain the cheapest forms of regulatory capital available
      • Replace expensive capital by issuing Lower Tier II
      • Achieve target Tier I ratio by using non-dilutive HT I capital
      • Time the issue ahead of major capital redemption in 2005 by the bank and other issuers in the same peer group
      • Issuing more efficient capital instruments to optimise the capital mix
      • Introduced to capital alternatives which meet both the economic capital requirements and regulatory/competitive standards
      • Moving towards a more
    31 Target capital position—December 2004 3,900 1,000 4,900 3,700 100 600 500 Economic capital Economic capital buffer Regulatory (hybrid) Tier 1 Lower Tier 2 Upper Tier 2 Tier 3 Optimal capital structure Economic Capital Regulatory capital 7% Tier 1 11% CAR 1,200 1,300 3,900 1,000 4,900 3,700 100 600 500 Economic capital Economic capital buffer Regulatory (hybrid) Tier 1 Lower Tier 2 Upper Tier 2 Tier 3 Optimal capital structure 7% Tier 1 11% CAR 1,200 1,300 Economic capital Regulatory capital New regulatory capital
  • 32. Asset liability management Objective JPMorgan solution Asset liability management
      • Implement liability management strategy to reduce funding costs
      • Introduce cost saving strategies such as equity-linked deposits, Quanto swap and Swap in arrears
      • Lower funding cost and increase fee income
      • On-balance sheet methods, such as holding longer duration assets (i.e., Introduction of new mortgage loans in Korea) or shortening assumed duration for deposits without maturity can prove be more effective for managing this risk
    Category
      • On-balance sheet methods, such as holding longer duration assets (i.e., Introduction of new mortgage loans in the bank’s home country) or shortening assumed duration for deposits without maturity can prove be more effective for managing this risk
      • Mitigate asset-liability mismatch (Liabilities longer than the assets
    32 Monthly assets and liabilities refixing risk (in b illion ) Net funding need (in billion) (30,000) (25,000) (20,000) (15,000) (10,000) (5,000) 0 5,000 10,000 15,000 20,000 25,000 M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 Assets and Liabilities (15,000) (10,000) (5,000) 0 5,000 10,000 15,000 M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12
  • 33. The bank could enhance shareholder value by around 9% of current market cap. from optimizing the balance sheet Quantifying the benefit for shareholders—market capitalization (billion) 33
  • 34. JPMorgan credentials 34 I   B   A
  • 35. JPMorgan is the only investment bank to offer comprehensive balance sheet advisory to FIG clients…
    • Excerpt of article
    • Also on the institutional side, the bank has been putting more resources in asset and liability management (ALM), another strategic push for the bank this year. JP Morgan set up an ALM team in Asia at the beginning of this year to target banks and life insurance companies around the region, and the bank now has projects in several countries, says Bulchandani, who heads up the team in conjunction with his credit derivatives role. “We started this effort at the end of February, and my target is to have between eight and 10 companies signed up with some completed, in a 12-month period,” he says.
    • Similar to the problems encountered by life insurance firms in Europe, Asia’s insurance companies face a mismatch in the yields they are able to achieve on their investments and the returns guaranteed on their policies. At the same time, with domestic fixed-income markets rarely stretching beyond 15years, there is a mismatch in duration in the asset and liability portfolios.
    • “ The liability side is similar to what happened with insurance companies in Europe,” says Bulchandani. “They have guarantees and they have embedded option-ality in their policies. The difference is that, by and large, Asian life insurance companies have realised the problem. They realize the benefits of diversification, they realize that they have to be more in fixed-income and use equity as a way of generating alpha. They really want to take fixed-income, they really want to take international assets and diversity. However, they have to ensure that they operate within the scope of existing regulations. The key regulations to consider are related to the amount of overseas assets the company can hold, the types of assets it can invest in, and the types of derivatives hedges it can execute.”
    • As part of its ALM approach, the banks first examines market and regulatory constraints and defines the objectives of the analysis, then sets the performance metrics, analyses, the overall asset and liability portfolios, and sets a tactical optimization benchmark for the insurance company to follow. “We are not telling the insurance companies to stop taking risk, but rather to take a mix of risks and to diversify,” continues Bulchandani. “If you look to 2005 and 2006, there are various significant factors that can affect the derivatives market- International Accounting Standard 39, Basel II, the tightening of credit spreads, and so on. And in the world, the bright spot is going to be ALM, which can give some positive momentum to the capital market growth.”
    Recognized leader in balance sheet advisory 35
  • 36. … and has enjoyed significant success across the region in delivering on our total balance sheet approach Key themes Overall financial efficiency IAS 39 Basel II Enhance risk adjusted returns Merger integration Concentration risk Total balance sheet approach to advisory business 36