This paper aims to analyse critical issues in the capital management in the light of recent financial crises, focusing on capital constraints by regulation and supervision in the composition of bank capital. Capital constraints by regulation and by supervision plays an important task in the level and composition of bank capital considering intensity and range of all risks. Instruments and business areas need to be considered. Bank discretional margins are very restricted and the influence of public authorities is substantial: it exerts an adverse effect on the quality banks that are capable of rational screening and monitoring and, at the same time, of sound risk management, efficiency, thereby achieving a good performance. Changes, incentives and recreating structural conditions postulate new and innovative measures build up by regulatory and also supervisory authorities. The raising of capital is the main tool used by regulation on a prudential application and by supervision on a discretional application in order to maintain the viability of the banking system. Capital requirements are calculated through Basel III and the forthcoming Basel IV and are also imposed as an additional tool through discretional decisions by supervisory authorities. Considering only the capital level is misleading as it is unable to create the premises for a sound and stable bank in the future time. The improvement of risk management through the identification, measurement and management of all risks linked with bank instruments and bank business areas is the best strategy to achieve structural reinforcement and, therefore, to ensure the soundness of individual banks and the banking system in the medium and long term. The improvement of efficiency in the various forms of cost, revenue and profit, would be in line with the structural premises for sound and viable conditions leading to better frameworks for the economic account from one period of time to another. The solvency risk concerns the different ability of banks to settle their debts at any cost. Solvency is achieved by means of systematically higher asset values as compared to liabilities, thereby indicating positive levels of the bank’s capital. This highlights the problem of growth of profit and of a bank’s recourse to market instruments in order to develop its capital and its monetary resources and production volumes. The expansion path starts from the raising of capital and positive performance, which in turn increases sound business and generation of profit. Capital raising creates premises for solvency, stability, business evolution, business growth in individual banks in Europe and world-wide. Capital raising is inspired by regulation and, at the same time, by supervision. Bank management is conducted through choices concerning the actual current situation and the future situation. Capital represents a key variable in business, but the improvement of risk management and efficiency constitutes the best reply as a means of reinforcing structural conditions for survival. This report aims to investigate these elements in order to express critical issues and critical points for the evolution of individual banks and their business. Basel I, Basel II and Basel III and forthcoming Basel IV rules increase the compliance costs of individual banks while disregarding the fact that banks differ greatly between small and medium banks in comparison with the largest banking institutions. The issue for banks is the use of rational and rigorous methods for the management of business areas and correlated risks, from the viewpoint of producing profits in the short, medium and long term. The establishment of more and more rules introduces greater complexity in bank regulation and, at the same time, increases compliance costs. Therefore a comparison of costs and benefits arising from the introduction of regulation should be performed. The habitual focus on increasing capital is not the correct approach, because it makes use of a unitary attitude, i.e. the “one size fits all” approach to banks which are profoundly different in their business areas and risk range. Rules essentially consider a loss coverage issue through an adequate capital level, and this is a very different matter from the actual ability to manage the entire risk range. Increasing the number and complexity of rules tends to introduce further complications in the task of supervision, but the main aim of supervision is still that of checking and ensuring control over the application of the rules in European banks. A banking crisis requires supervision initiatives which usually involve the raising of capital as a standard approach to build up a “wall” against the worsening or failure of the situation of a bank. Capital raising for satisfying regulatory and supervisory capital requirements contribute to increasing the capital level and therefore the absorption capacity in the event of unexpected losses. A higher level of capital will be able to handle negative economic results, and bank survival: solvency can be measured at given times. Improving risk management and efficiency allows banks to achieve structural conditions to recreate positive premises towards positive trends in costs and revenue and, at the same time, in the evolution of assets, liabilities and capital. This is the key point to pursue in the evolution of management conditions within European banks and within world banks.

Capital management in European banks. Critical issues

Fabiano Colombini
2018

Abstract

This paper aims to analyse critical issues in the capital management in the light of recent financial crises, focusing on capital constraints by regulation and supervision in the composition of bank capital. Capital constraints by regulation and by supervision plays an important task in the level and composition of bank capital considering intensity and range of all risks. Instruments and business areas need to be considered. Bank discretional margins are very restricted and the influence of public authorities is substantial: it exerts an adverse effect on the quality banks that are capable of rational screening and monitoring and, at the same time, of sound risk management, efficiency, thereby achieving a good performance. Changes, incentives and recreating structural conditions postulate new and innovative measures build up by regulatory and also supervisory authorities. The raising of capital is the main tool used by regulation on a prudential application and by supervision on a discretional application in order to maintain the viability of the banking system. Capital requirements are calculated through Basel III and the forthcoming Basel IV and are also imposed as an additional tool through discretional decisions by supervisory authorities. Considering only the capital level is misleading as it is unable to create the premises for a sound and stable bank in the future time. The improvement of risk management through the identification, measurement and management of all risks linked with bank instruments and bank business areas is the best strategy to achieve structural reinforcement and, therefore, to ensure the soundness of individual banks and the banking system in the medium and long term. The improvement of efficiency in the various forms of cost, revenue and profit, would be in line with the structural premises for sound and viable conditions leading to better frameworks for the economic account from one period of time to another. The solvency risk concerns the different ability of banks to settle their debts at any cost. Solvency is achieved by means of systematically higher asset values as compared to liabilities, thereby indicating positive levels of the bank’s capital. This highlights the problem of growth of profit and of a bank’s recourse to market instruments in order to develop its capital and its monetary resources and production volumes. The expansion path starts from the raising of capital and positive performance, which in turn increases sound business and generation of profit. Capital raising creates premises for solvency, stability, business evolution, business growth in individual banks in Europe and world-wide. Capital raising is inspired by regulation and, at the same time, by supervision. Bank management is conducted through choices concerning the actual current situation and the future situation. Capital represents a key variable in business, but the improvement of risk management and efficiency constitutes the best reply as a means of reinforcing structural conditions for survival. This report aims to investigate these elements in order to express critical issues and critical points for the evolution of individual banks and their business. Basel I, Basel II and Basel III and forthcoming Basel IV rules increase the compliance costs of individual banks while disregarding the fact that banks differ greatly between small and medium banks in comparison with the largest banking institutions. The issue for banks is the use of rational and rigorous methods for the management of business areas and correlated risks, from the viewpoint of producing profits in the short, medium and long term. The establishment of more and more rules introduces greater complexity in bank regulation and, at the same time, increases compliance costs. Therefore a comparison of costs and benefits arising from the introduction of regulation should be performed. The habitual focus on increasing capital is not the correct approach, because it makes use of a unitary attitude, i.e. the “one size fits all” approach to banks which are profoundly different in their business areas and risk range. Rules essentially consider a loss coverage issue through an adequate capital level, and this is a very different matter from the actual ability to manage the entire risk range. Increasing the number and complexity of rules tends to introduce further complications in the task of supervision, but the main aim of supervision is still that of checking and ensuring control over the application of the rules in European banks. A banking crisis requires supervision initiatives which usually involve the raising of capital as a standard approach to build up a “wall” against the worsening or failure of the situation of a bank. Capital raising for satisfying regulatory and supervisory capital requirements contribute to increasing the capital level and therefore the absorption capacity in the event of unexpected losses. A higher level of capital will be able to handle negative economic results, and bank survival: solvency can be measured at given times. Improving risk management and efficiency allows banks to achieve structural conditions to recreate positive premises towards positive trends in costs and revenue and, at the same time, in the evolution of assets, liabilities and capital. This is the key point to pursue in the evolution of management conditions within European banks and within world banks.
Colombini, Fabiano
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11568/925582
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