Capital Adequacy Programs: Untapped Opportunities

While globally financial institutions (FIs) are working to meet regulatory requirements, it’s demanding an unprecedented spend on human resources and technology. Our recent survey of such institutions, conducted jointly with Chartis, indicated that many are simply overwhelmed by the number of regulations with which they must comply. The unfortunate consequence is that, for many, planning around stress testing and capital adequacy has become a reactive exercise.

Quite simply, that’s a missed opportunity.

In fact, by adopting efficient capital-focused strategies, FIs can drive improvements in risk management across the business, particularly in retail banking and capital markets. Some of the best practices reported by survey participants included:

1. Establishing and enforcing enterprise standardized model risk management practices; using industry standards, benchmarks and calibration tools to consistently compare, contrast and report on portfolio performance.
2. Optimizing retail product portfolios for low capital consumption, by restructuring products and exiting from unprofitable business lines.
3. Focusing on coverage and granularity of risk models: combining an enterprise-wide view of risk with the ability to understand the impact of multiple economic regional variables for stress testing.
4. Ensuring data quality and accuracy, providing a foundation for capital-efficient models and strategic business decision making.

With capital remaining scarce, we forecast that capital adequacy and capital management will continue to top the strategic agenda at FIs. Best practice will lead to the adoption of enterprise stress testing platforms that include optimization, model management and benchmarking tools to support the business in the planning for the most efficient use of capital.

Stay tuned to our blog where I’ll continue to discuss key learnings from this survey. For full results, you can download the newly published report: Leading Practices in Capital Adequacy.

Thanks to my colleague Campbell Scott for co-authoring this post with me.