The growing demand for capital from both the market and the different regulators has contributed to making capital an increasingly scarce resource for financial institutions and, therefore, a key factor in their management strategy.
As a result, sound capital planning has become increasingly important and is now a focus of concern for the companies.
A robust capital plan should be supported by 4 key pillars:
- First, a well-structured governance:
- Where the responsibilities of each of the areas involved are clearly defined, and capital commitments are approved and monitored at the highest level in the organization.
- Where there is a clear definition of the capital and return-on-capital metrics to be used both in setting business objectives and in monitoring their achievement.
- And where the impact of achieving the objectives is clearly defined on the "balance scorecard" for each business.
- Second, a solid capital planning execution process:
- That starts from a capital allocation methodology at the point of departure that has a sufficient level of granularity (for example, by business line or segment) and is known to all members of the process.
- That is able to project portfolio evolution in terms of capital consumption and profitability (generally at 3 years) and compare them with the set objectives.
- And that relies on a model for “fine-tuning” the projections based on a capital optimization methodology that ensures target metric maximization.
- Throughout this process, it is key to have robust models and methodologies in place for the projection of the different balance sheet and income statement items, as this will serve to refine and to challenge the business projections as well as to conduct "what if" exercises if perspectives change.
- All the above could not be done without quality databases that enable model development as well as the planning exercise itself.
To meet both management needs and regulatory requirements, such as ICAAP or supervisory stress tests, Management Solutions has tools adapted to regulatory requirements that facilitate compliance and proper management.