The Power of an Independent Corporate Center

Consumers around the world are quickly adopting digital banking. Incumbents only have a short period to adjust to this new reality or risk becoming obsolete.

March 2015 | by John Olivier

Reconciling capital and strategic planning is essential to ensure consistency between risk and business strategies. As capital becomes a scarce resource, banks must consider, as they never have before, the cost of capital, while still pursuing growth and profit. Banks that use their capital inefficiently will be left behind. However, the goal of alignment remains an aspiration for many. Fewer than half of European banks define capital planning in line with business strategies and their risk-return profile.

A waiver is helpful if subsidiaries are capital-constrained or if the bank holding company does not want to transfer capital among subsidiaries. A holding company that wins a waiver may avoid many stand-alone requirements regarding processes, models, and reporting. On the other hand, it still has to prove integration into the group’s risk-management processes. This is not trivial, as it often comes with technology requirements and other considerations.

We have conducted a benchmark analysis of the ICAAP methods employed by nineteen leading European banks, using publicly available information supplemented by interviews with bank executives. The comparison reveals a wide range of approaches to the assessment of risks and capital adequacy. Our analysis looks at both capital demand (capital requirements and risk drivers) and capital supply (risk-bearing capacity). While banks often model demand with quite advanced approaches, the modeling of risk-bearing capacity tends to be rudimentary. Most banks use either regulatory capital or adjusted regulatory capital to calculate risk-bearing capacity.

As noted, most banks take a regulatory or accounting perspective for the assessment of their risk-bearing capacity; very few banks take a full economic perspective. About two-thirds of the banks analyzed adjust the regulatory capital to calculate their risk-bearing capacity. Adjustments vary; most have to do with hybrid instruments, minority interests, revaluation reserves, unrealized gains and losses, goodwill, and other intangible assets. Around ninety percent of the banks in the sample deduct revaluation reserves, goodwill, and other intangible assets from the available capital. 


Executive Editor

Ms Anna Sullivan

Ms Anna Sullivan