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

19

Conclusion

This final chapter looks beyond the mainly technical issues covered so far, and examines the managerial aspects of implementing a capital allocation system. The typical stages in the development of such a system and the options available are examined first; this is followed by a look at the process itself and its implementation. The chapter concludes with a discussion of the kind of barriers to implementation which exist. As in earlier chapters, the generic term “RoC” is used to refer to any measure of performance which divides some definition of “return” (profit, contribution, revenue etc., where non-accounting items such as risk costs and cost of capital may form part of the definition) by some definition of “capital” (regulatory capital, risk capital etc.).

CAPITAL ALLOCATION AS A PERFORMANCE MEASURE

A performance measure which cannot be influenced by the behaviour of those being measured is of little use, as it will have no incentive effect. Indeed, one of the most difficult and dangerous aspects of any performance measurement system is what the author likes to call the “Heisenberg principle of MIS”, after the German scientist Werner Heisenberg, one of the pioneers of quantum mechanics. Heisenberg's famous uncertainty principle is related to the problem of observing the exact speed and location of sub-atomic particles: this can be done only by shining light or some other wave on the particles, which has the effect of changing the velocity and/or path of the ...