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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

Capital Requirements forFinancial Holding Companies in TaiwanTsai-Ching Lai & Min-Teh Yu

Jin-Wen Institute & Taiwan Insurance Institute

Providence University

slide2

Introduction

◆ In 2001, the FHC Act was passed.

◆ 14 FHCs in Taiwan, a total of 802 b in BV as of 2003.

(IUS$=32NT$)

slide3

◆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

slide4

◆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

slide5

Data

Table 1

Data and Estimates

01/01/1997 -12/31/ 2001

Industry Daily Index and Average

slide6

Table 2

Correlation Matrix for 4 Subsidiary Indexes

slide7

Table 3

Asset Allocations of FHC

slide13

Table 4

Capital-at-Risk

Pure Risk Analysis

(Unit: Standard Unit)

slide14

Table 5

Capital-at-Risk

Risk and Return Analysis

(Unit: Standard Unit)

slide15

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