The McKinsey Quarterly has just published a new report with the ominous title Day of Reckoning for European Banking. The authors discuss the profound impact that regulations — in particular Basel III — are having on banks’ return on equity. The authors note that “banks should develop a regulatory mitigation road map, which can be embedded into a comprehensive strategic review, to rebuild ROE step by step.”
The McKinsey report makes an interesting companion piece to FICO’s most recent Insights white paper, also published this week: Where Do You Fit on the Risk/Capital Management Matrix?This paper explores an issue I have blogged about before: Success in retail banking increasingly depends on how well an institution performs in capital management and risk management. By looking at these together, banks can see where they stand in relation to world-class performance.
Using a matrix of risk and capital management, the paper points out what best practices are across the spectrum, and gives case studies of banks that have advanced their abilities to improve results.
While we agree with McKinsey on the importance of developing a regulatory mitigation road map, we think that any consideration of regulatory compliance needs to focus on risk management as well. In fact, as our paper points out, the most sophisticated banks are looking at how they can develop strategies that advance their risk management and capital optimization strategies simultaneously.