Capital optimisation is increasingly becoming an important tool for a bank’s finance function to enhance profitability. As Basel-II and then Basel-III becomes the norm and pressure on capital increases, a robust capital management process can help increase a bank’s RoE by as much as 2 to 4 percentage points. Moreover, some of the levers for capital optimisation will also over time lead to higher quality assets and therefore reduce risk losses.
These levers fall under three categories:
- Technical levers: Optimization of RWA calculation methodologies and processes through improvement of rules, methodologies and data quality to calculate risk parameters (PD, EAD, LGD) and RWA and optimization of credit processes model (Basel II)
- Business levers: Front-line capability building to drive appropriate front-line behaviour manage performance metrics, and incentives with an aim to maximizing return on capital
- Financial levers: Portfolio and capital optimization to reduce capital consumption through financial measures (eg. divestures, securitization) not impacting core business activities