Dear SAP Banking Community members,
As discussed during the last few weeks, the necessity for a systematic capital management system for all major banks is becoming more and more critical.
From that perspective, let me recommend you to read the following article in the Guardian.
http://www.guardian.co.uk/business/2010/nov/23/europeanbanks-banking
The article highlights the European bank’s share prices after the Ireland bailout. Obviously, the market fears that the losses of some European banks due to their investments in the Irish economy could cause the banks to be undercapitalized or even default.
As you might know capital management requires efficient utilization of capital, and as we are all aware of the risks of having an undercapitalized financial system; credit crunch - no investment/credit, and as the saddest consequence, economic recession.
But the contrary is not desirable either, having an over-capitalized financial system means that very critical resources are frozen without generating any profit for the banks, the shareholders or the economy in general.
Thus it seems natural that an efficient utilization of capital would constitute keeping the capital levels of the bank slightly above
Regulatory Capital Levels (according to the solvency regulation).
- If a bank’s capital is below the regulatory levels: undercapitalized and potentially in insolvency.
- If a bank’s capital is much higher than the regulatory levels: free capital is not invested which is preventing the institution from making additional profits (something that would upset the shareholders).
Now the risk weighted assets calculation is the key for determining the free capital available for future investments, and is consequently a key factor for the bank’s business planning.
Determining the free capital is not an easy task, as any financial investment, by definition, is a dynamic process.
Changes in the economic environment or the risk associated with financial investments produces a different result in the calculation of risk weighted assets, and consequently the bank’s capital consumption.
In my opinion, stress testing is the key. Stress testing has been very important in determining the strength of a financial system in order to support losses in portfolio values and is subsequently also a key component of efficient capital management. From a business planning perspective stress testing is the key for determining the “buffer” of free capital a bank has available for its business planning.
What do you think?
I am looking forward to read your opinions.
Kindest Regards.
Ferran.
As discussed during the last few weeks, the necessity for a systematic capital management system for all major banks is becoming more and more critical.
From that perspective, let me recommend you to read the following article in the Guardian.
http://www.guardian.co.uk/business/2010/nov/23/europeanbanks-banking
The article highlights the European bank’s share prices after the Ireland bailout. Obviously, the market fears that the losses of some European banks due to their investments in the Irish economy could cause the banks to be undercapitalized or even default.
As you might know capital management requires efficient utilization of capital, and as we are all aware of the risks of having an undercapitalized financial system; credit crunch - no investment/credit, and as the saddest consequence, economic recession.
But the contrary is not desirable either, having an over-capitalized financial system means that very critical resources are frozen without generating any profit for the banks, the shareholders or the economy in general.
Thus it seems natural that an efficient utilization of capital would constitute keeping the capital levels of the bank slightly above
Regulatory Capital Levels (according to the solvency regulation).
- If a bank’s capital is below the regulatory levels: undercapitalized and potentially in insolvency.
- If a bank’s capital is much higher than the regulatory levels: free capital is not invested which is preventing the institution from making additional profits (something that would upset the shareholders).
Now the risk weighted assets calculation is the key for determining the free capital available for future investments, and is consequently a key factor for the bank’s business planning.
Determining the free capital is not an easy task, as any financial investment, by definition, is a dynamic process.
Changes in the economic environment or the risk associated with financial investments produces a different result in the calculation of risk weighted assets, and consequently the bank’s capital consumption.
In my opinion, stress testing is the key. Stress testing has been very important in determining the strength of a financial system in order to support losses in portfolio values and is subsequently also a key component of efficient capital management. From a business planning perspective stress testing is the key for determining the “buffer” of free capital a bank has available for its business planning.
What do you think?
I am looking forward to read your opinions.
Kindest Regards.
Ferran.
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