New on FinoLib · Volume IV: Finance Careers
My latest article is now live on FinoLib, the free finance library I write: Finance Org Charts at Banks, Insurers, PE and Hedge Funds, from Volume IV: Finance Careers. Read the summary below for the substance of the topic, then continue to FinoLib for the complete treatment.
B.2 Bank / Financial Institution
The idea in plain words
A bank’s finance team is built around capital, liquidity and legal entities. On top of the usual roles it adds regulatory capital, product control, legal-entity control, asset-liability management and finance change. The Chief Risk Officer is a peer of the CFO, not a subordinate, a line that US and Indian rules write down.
Key points
■Sizes assume roughly $100–500 billion of assets.
■US holding companies of $100 billion or more face the Fed’s stress test (annual, or every other year for Category IV) and must have a CRO reporting to the risk committee and CEO.
A closer look
A bank’s finance function looks structurally similar to a large corporate’s at first glance, but regulatory capital management becomes so central that it fundamentally reshapes the organization, and the CFO works in unusually close, near-daily partnership with the Chief Risk Officer.
Why It Matters
The CFO-CRO partnership at a bank is closer to joint leadership than a typical executive-to-executive relationship: capital adequacy requires finance’s numbers and risk’s models to agree, and supervisors expect to see that collaboration working, not each function in its own silo.
Career Insight
Most bank finance careers start in one of three rooms: product control (close to traders, fast and numerical), regulatory reporting (close to rules, steady and in demand), or financial control (the ledger and legal entities). In your first year, learn how a trade or loan travels from entry to the ledger to a capital return; few people can trace a number that far, and it gets you noticed.
Recap
A bank’s finance function is built around capital, liquidity and legal entities, adding regulatory capital, product control, legal-entity control, ALM and finance change. The CRO is a peer of the CFO.
B.3 Private Equity and Hedge Fund
The idea in plain words
Private equity firms and hedge funds both keep the books of the management company next to the books of each fund. But they work differently. Private equity centers on capital calls, the waterfall of payouts, valuation and portfolio companies. A hedge fund centers on daily profit and loss, trading operations, prime brokers and a monthly official NAV.
Key points
■Two charts: PE ($10–50 billion committed) and hedge fund ($5–20 billion AUM).
■The Chief Compliance Officer should not report to the CFO; compliance exists at banks, brokers and insurers too.
A closer look
A PE firm or hedge fund’s own finance function is different in kind from an operating company’s — the CFO here manages the finances of the management company itself (its own operating costs, its own profitability) alongside fund-level administration and reporting to the LPs who supplied the capital being invested.
Analogy
Think of it as running two separate sets of books simultaneously: one for the firm itself as a small business (the management company), and several entirely separate ones for each fund it manages on behalf of outside investors — a structural duality that simply doesn’t exist at a normal operating company, where there is only ever one company’s books to keep.
Recap
PE firms and hedge funds both keep management-company books beside fund books, but PE centers on capital calls, waterfalls and valuation, a hedge fund on daily P&L and trading operations.
B.4 Insurance Company
The idea in plain words
An insurer adds three things to the usual finance roles: actuarial reserving, solvency reporting and investment management. For property and casualty insurance, reserving projects the cost of claims from development triangles. For life insurance, it values promises that run decades ahead. The results are reported under statutory rules, US GAAP or IFRS 17.
Key points
■Sizes assume roughly $5–20 billion of annual premiums.
■P&C: claims reserves and IBNR; life: policy reserves set by valuation actuaries.
A closer look
An insurer’s finance function carries a function that doesn’t exist elsewhere: the actuarial team, responsible for estimating how much money the company will eventually need to pay out on policies it has already sold — sometimes decades into the future.
Recap
An insurer adds actuarial reserving, solvency reporting and investment management to the usual finance roles. P&C reserves are claims reserves and IBNR; life reserves are set by valuation actuaries.
What the full article covers
In the full article I take you through these sections:
■B.2 Bank / Financial Institution
■B.3 Private Equity and Hedge Fund
■B.4 Insurance Company
It includes a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume IV: Finance Careers
Read the full article on FinoLib
The complete article, Finance Org Charts at Banks, Insurers, PE and Hedge Funds, with every worked example, diagram, quiz and source, is free to read in Volume IV, Finance Careers on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance