Capital Efficiency and Optimisation

As regulators seek to strengthen the stability and solvency of financial  institutions, the pressure on return on equity is immense. Regulators have, for
a long time, been prodding banks to identify new sources of revenue and
capital.

CRD V and CRR II are now a reality with CRD VI and CRR III just around the corner. It is thus essential for Banks to assess the nature of instruments used and acknowledge that embedded features, like recourse, can have a large bearing on capital requirements. Further to that, the years of increased requirements have created fundamental sustainability and business model challenges for banks.

With banks dealing with a multitude of business challenges and constrained capital requirements, it is important to seek out efficiencies in the current capital usage. Unlocking capital from the existing balance sheet positions can prove far more effective in the near-term than profitability related capital accretion.

Experience has shown that in unlocking capital and liquidity from existing balance sheet positions, Banks need to consider a number of effects. The quantum of capital sub-optimality caused by these effects may differ from bank to bank depending on various factors including technology, processes, computation techniques, statistical models and people’s skill-sets. Addressing the effects can unlock a significant amount of capital to support growth and counterbalance the pressure on return on equity caused by CRD V (and CRD VI) requirements.

Deloitte's latest publication considers each of these effects, which include pricing and profitability, capital planning and management, as well as allocation and computation, and sets out suggestions for Banks on how to address these.