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).
Regulatory expectations
Meeting regulatory expectations and best practices around capital planning and the ICAAP and preparing for SREP conducted by the ECB and the national authorities is a challenge.
In the 2023 SREP Aggregate results, the ECB expressed ongoing concerns about the reliability of banks’ capital planning frameworks and their ability to produce reliable capital projections under baseline and adverse scenarios as part of the overall ICAAP. This finding reinforces the renewed regulatory focus across all elements of the capital planning process (e.g., frameworks, capacity, and quality) given it can have a major impact on reliability and timeliness of the capital projections, which is a key element to ensure resilience.
Regulatory change
The European Banking Package / CRR 3 implements the latest Basel III framework within the EU. This poses several challenges for banks (both small and large), not only from an implementation perspective (i.e., deliver a complex change program) but also from the capital and risk ramifications of these changes. For instance, the capital impact from CRR 3 could result in a strategic review of the bank's business model as some products / business lines may no longer be viable or optimal due to the additional capital consumption.
Data
High data quality is an integral part of stress testing, capital management and regulatory reporting. Collecting, validating, and providing the necessary data can be time-consuming and resource intensive.
Data granularity, availability, and proper alignment with the supervisory definitions can be a challenging process (exacerbated for larger institutions, with multiple business lines, source systems and high volume of business).
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
