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Value and Capital Management: A Handbook for the Finance and Risk Functions of Financial Institutions by Thomas C. Wilson

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Appendix DBeyond Debt and Equity

As described in Chapter 19, CFOs and CROs must help their firm choose the right mix of financing on the equity-to-debt continuum, beginning with shareholders' invested funds and continuing on through hybrid, subordinated, senior and collateralized funding, ultimately reaching client-based funding alternatives such as bank deposits or insurance reserves.

Each of these alternatives offers advantages and disadvantages, illustrated by the following important questions.

  • To what extent does the alternative qualify as a substitute for shareholder capital under regulatory and rating agency solvency regimes? Related to this, to what extent are external limitations put on the use of different funding alternatives?
  • What is the all-in after-tax cost of funding for the different alternatives, including interest and tax considerations, structuring and credit-enhancement expenses and, especially for securitized financing alternatives, additional effects in the form of reducing risk capital requirements and the ability to increase volumes by relaxing other leverage restrictions.
  • Finally, how sustainable is the source of funding under different scenarios, for example a crisis in confidence or “run on the bank,” a shock to inter-bank funding liquidity due to a flight to quality or other systemically relevant event? Liquidity and funding risk considerations are examined in greater detail in Chapter 18.

The remainder of this appendix provides a brief overview of ...

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