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

15

Implementing Capital Allocation Policies and Procedures

Putting value creation first can bring huge benefits, not only to the company, but to society as a whole. No company can survive for long unless it creates wealth. A sick company is a drag on society. It cannot sustain jobs, much less widen the opportunities available to its employees. It cannot adequately serve its customers. It cannot give to philanthropic causes.¹

Most of this book so far has been focussed on the issues surrounding investment and allocation of capital; it has been assumed all along that the required level of return (the cost of capital) is known, and that the “return” part of “return on capital” is known. This section of the book deals with these and other related issues. I also attempt to solve the perennial conundrum of how to manage the regulatory requirement when an internal risk-capital model is adopted.

As with other sections of the book, this first chapter introduces the concepts involved, and further chapters look at each in more detail. Chapter 16 is dedicated to a detailed analysis of the economic profit concept, and Chapter 17 examines the tools available for assessing the required cost of capital and takes a closer look at the way the stock market assesses bank performance, Chapter 18 is dedicated to some of the internal measures of return which can cause problems if not handled carefully. Those readers who do not want to study all of these in more detail can move straight on to Chapter ...