Capital and Risk Management

Overview

Capital management is a core activity of bank management. Its primary objective is to balance the supply of capital with the demand for it. In doing so, the interests and requirements of key stakeholders, most notably equity and debt investors, clients, analysts and the bank’s supervisors and management, must be considered. The demand for capital arises as banks’ business activities entail risks that need to be adequately covered to ensure that potential losses can be absorbed both in the ordinary course of business and under stress. Ultimately, the level of capital held needs to address all stakeholder requirements while permitting an adequate return on capital. Risks managed range from idiosyncratic, business model specific risks to systemic or macroeconomic risks that banks are commonly exposed to.

Capital management operates as an advisor to bank management for day-to-day business decision-making and execution as well as planning and strategy formulation, ensuring that sufficient capital is available at all times, that it is invested wisely and that adequate returns are provided. Effective capital and risk management frameworks contribute to an efficient functioning of banks as part of capital markets, foster financial stability and further integration of capital markets in the EU, UK and globally.

Multiple definitions of capital and risks are used in bank management, ranging from the regulatory (prudential or “normative”) capital and risks as defined by the Basel standards to economic capital and risks as prescribed by bank’s internal definitions and in accordance with economic risk measurement concepts. It also includes capital defined under crisis management aspects as capital components and quantification of capital can take on specific characteristics under recovery or resolution conditions.

AFME assists their Members in all of the aforementioned aspects of capital and risk management and the respective policy making, where we focus primarily on financial risks (quantifiable and non-quantifiable). We cover both the EU and UK, while keeping the global nature of finance and financial regulation into account. Besides conventional risk types, AFME also engages in thought leadership covering new and emerging risks, facilitating an effective cooperation between the industry and policy makers in order to create most suitable capital and risk management frameworks. We interact with our Members, regulators, supervisors and legislators providing evidence based information and collective knowledge and experience.