S
Shillington
Member
Hi,
I have two questions:
1.) One of the reasons why companies elect to go with internal models instead of relying of the Standard Formula (SF) is to get a reduction in their capital requirements. One large difference between the SF and an internal model approach is that operational risk is treated as having no diversification benefits in the SF, but in internal models it can be heavily diversified. Why is this allowed? It seems very disparate.
2.) From my perspective, on a balance sheet you have Assets, Liabilities and then Equity. Equity being the remaining funds left over for Shareholders in the event that the company were immediately sold or wound up, and also what I consider the "available capital" to be for a company. What does "ordinary shares" mean as an example of Tier 1 capital?
For example, on the Aviva balance sheet at YE14 they had the following items:
Equity
Ordinary share capital 737
Preference share capital 200
Called up capital 937
And other items
I don't understand how they can hold 'Ordinary Share Capital $737m' on their balance sheet. This is money which has been paid by shareholders to the company in exchange for shares. But the company has then spent that money backing projects and employing people and it has surely moved to different items on the balance sheet (e.g. operating expenses, reinsurance payable etc etc). How can you hold a reserve for something like that?
Thanks
I have two questions:
1.) One of the reasons why companies elect to go with internal models instead of relying of the Standard Formula (SF) is to get a reduction in their capital requirements. One large difference between the SF and an internal model approach is that operational risk is treated as having no diversification benefits in the SF, but in internal models it can be heavily diversified. Why is this allowed? It seems very disparate.
2.) From my perspective, on a balance sheet you have Assets, Liabilities and then Equity. Equity being the remaining funds left over for Shareholders in the event that the company were immediately sold or wound up, and also what I consider the "available capital" to be for a company. What does "ordinary shares" mean as an example of Tier 1 capital?
For example, on the Aviva balance sheet at YE14 they had the following items:
Equity
Ordinary share capital 737
Preference share capital 200
Called up capital 937
And other items
I don't understand how they can hold 'Ordinary Share Capital $737m' on their balance sheet. This is money which has been paid by shareholders to the company in exchange for shares. But the company has then spent that money backing projects and employing people and it has surely moved to different items on the balance sheet (e.g. operating expenses, reinsurance payable etc etc). How can you hold a reserve for something like that?
Thanks