Introduction
Capital management is the important process of ensuring that banks have adequate capital to cover their risks and support their business activities. It is a vital discipline that helps banks in maintaining their solvency, profitability, and resilience in the face of various shocks and uncertainties. It involves measuring, monitoring, and controlling the various types of risks that banks face, such as credit, market, operational, liquidity, environmental, social, and governance (ESG), and reputational risks and ensuring that sufficient quality capital is maintained to cover these risks.
Additionally, to establish an effective capital management approach, banks must robustly implement the Internal Capital Adequacy Assessment Process (ICAAP), which considers both the regulatory (normative) and internal (economic) perspectives when setting capital adequacy and managing capital. The ICAAP is key from a strategic and regulatory perspective (i.e., the Supervisory Review and Evaluation Process (SREP)), and should align with, and provide input into, the internal liquidity adequacy assessment process (ILAAP) and Recovery Planning processes.
Furthermore, capital management also encompasses regulatory reporting, which is one of the key tools used by regulators to manage the resilience and stability of the financial markets.
Challenges you might be facing
- Emerging risks
- Regulatory expectations
- Regulatory change
- Data
Emerging risks
Embedding emerging risks into the capital planning and ICAAP process is a difficult task. For instance, the incorporation of ESG risks within stress testing processes is an ongoing challenge, with the focus largely being on credit risk so far. However, the ECB has been clear that ESG should be considered across all risk types including market, liquidity, and operational risks. This will pose an even greater challenge for institutions across the EU. More details on ESG Risk Management can be found in our ESG Risk Workstream.
Other risks such as cyber and other non-financial risks remain 'hard to model' and quantify/measure, which creates issues from a capital adequacy and capital planning perspective (i.e., it could become difficult to ascertain with a high degree of confidence whether these risks have been appropriately considered).
How we can help
PwC has supported numerous banks in various capital management, capital planning and regulatory reporting projects.
As a leading consulting firm, we can work closely with your organisation to deliver high-quality outcomes across all aspects of the capital management process. We can also advise on value-adding initiatives, identify areas requiring enhancements, and support clients on ensuring compliance with regulatory requirements.
Contact us
Capital Management Workstream Lead, Partner, PwC Ireland (Republic of)
Tel: +353 87 649 4780
