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Capital Requirements for Financial Holding Companies in Taiwan Tsai-Ching Lai & Min-Teh Yu

Capital Requirements for Financial Holding Companies in Taiwan Tsai-Ching Lai & Min-Teh Yu. Jin-Wen Institute & Taiwan Insurance Institute Providence University. Introduction. ◆ In 2001, the FHC Act was passed. ◆ 14 FHCs in Taiwan, a total of 802 b in BV as of 2003. (IUS$=32NT$).

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Capital Requirements for Financial Holding Companies in Taiwan Tsai-Ching Lai & Min-Teh Yu

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  1. Capital Requirements forFinancial Holding Companies in TaiwanTsai-Ching Lai & Min-Teh Yu Jin-Wen Institute & Taiwan Insurance Institute Providence University

  2. Introduction ◆ In 2001, the FHC Act was passed. ◆ 14 FHCs in Taiwan, a total of 802 b in BV as of 2003. (IUS$=32NT$)

  3. ◆Current Capital Adequacy Requirements: (IUS$=32NT$) Stand-alone basis rather than the combined basis. > Banking - 10 billion NT > Securities - 1 billion NT > Non-life insurance - 2 billion NT > Life insurance - 2 billion NT > FHC - 20 billion NT

  4. ◆A simple attempt to measure the risk capital for FHC and its Subs using VaR method. *Risk Capital = Capital-at-Risk = Value-at-Risk VaR = the quantity of capital required to ensure, with a given CL, that the enterprise does not become insolvent. *A FHC in Taiwan must be a pure holding company ◆Determine the asset allocations of FHC for it subs. Allocation methods:Equal-weight, Regulatory, Mean-Variance, Mean-VaR ◆Index portfolio proxies for each sub

  5. Data Table 1 Data and Estimates 01/01/1997 -12/31/ 2001 Industry Daily Index and Average

  6. Table 2 Correlation Matrix for 4 Subsidiary Indexes

  7. Table 3 Asset Allocations of FHC

  8. (A) Banking subsidiary – Historical Simulation VaR

  9. (B) Securities subsidiary – Historical Simulation VaR

  10. (C) Non-life subsidiary – Historical Simulation VaR

  11. (D) Life insurance subsidiary – Historical Simulation VaR

  12. (E) FHC – Historical Simulation VaR

  13. Table 4 Capital-at-Risk Pure Risk Analysis （Unit: Standard Unit）

  14. Table 5 Capital-at-Risk Risk and Return Analysis （Unit: Standard Unit）

  15. Conclusion • Risk Capital of FHC: MVaR < MV < Reg • - MVaR is Lowest subject to the same risk / CL • 2. Diversification Effect: MVaR > MV > EW > Reg • - More effective for MVaR than Reg • 3. Risk/Return Efficiency: MVaR > MV > EW > Reg • - Efficient use of capital • 4. Capital Requirements: • - Combined basis at FHC > Stand-Alone at Subs • 5. Rooms for Reg to changes towards MVaR & MV

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