Managing Risk and Capital

Banks have traveled a hard road since the global financial crash of 2008. They have had to weave their way through the wreckage of bad debt, volatile funding markets and an uncertain economic environment. Now, tough new rules under Basel III and a host of local regulations will require banks to significantly increase capital and adhere to stringent new liquidity and funding mandates.

Meeting the new standards will put a big dent in banks’ return on equity and make it much harder for them to exceed their cost of capital. As banks begin to come to grips with these new realities, it is clear that many have been using an incomplete map to guide their business. The pursuit of revenue and earnings growth with insufficient attention to the balance sheet ran them into a ditch.

A comprehensive analysis by Bain & Company of approximately 200 banks around the world and interviews with more than 50 senior executives at more than 30 global institutions reveal how banks are modifying a broad range of practices they relied on before the crisis in order to better compete in the new environment. During the pre-crisis years of benign credit conditions and readily available liquidity, the disciplines of managing the balance sheet atrophied, becoming the almost exclusive preserve at many institutions of a small team of highly-skilled technocrats working from corporate headquarters. Leading banks now recognize that the ability to fully account for risk, capital and liquidity in line decisions will be a source of competitive advantage.

Click here to download the report from Bain & Company.