Managing Bank Capital: Capital Allocation and Performance Measurement, 2nd Edition

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Managing the Available Capital Base

What we call profits, the money left to service equity, is usually not profit at all Until a business returns a profit that is greater than its cost of capital, it operates at a loss. Never mind that it pays taxes as if it had a genuine profit. The enterprise still returns less to the economy than it devours in resources … Until then it does not create wealth; it destroys it.¹

This section of the book examines the treasurer's view of capital: although the name and exact responsibilities may differ from bank to bank, the “treasurer” here is defined as the individual or department charged with the actual raising of capital for the bank. This may be part of the Asset and Liability Management function, or handled in the treasury area. It may even be managed by a separate department charged with the specific role of raising and managing long-term debt and other instruments, some of which may be classified as capital.

There are three distinct challenges to manage here:

• ensuring that the total amount of available capital is consistent with the bank's current and planned levels of activity and desired level of capital adequacy;
• selecting the appropriate mix of capital instruments, and then raising them and managing the outstanding balance; and
• ensuring that the cash raised is invested in an appropriate manner.

We will here assume that the choice of capital definition (risk capital, regulatory capital etc.) has been made, and that the treasurer ...