The Principles of Banking

Chapter 17

Bank Strategy II: Capital and Funding Management

We continue the theme of bank strategy with a look at business best-practice capital and funding management. We first consider the textbook treatment of a bank's capital, which is also business best-practice for how capital should be managed. We then look at:

capital management policy, and capital strategy;

systemic risk and macroprudential strategy, and benchmarking against one's peer group;

funding management policy.

The last part of the chapter includes a review of derivatives collateral funding management. Collateral funding requirements can be a significant part of the overall liquidity exposure of a bank, and so it is important that this area is included within the discipline of the firm's overall approach to liquidity risk management.

Textbook treatment of bank capital

The core Tier 1 capital base of a bank comprises its initial capital, or start-up capital, and retained earnings that have been placed in the reserves. The accounting and regulatory treatment apart, this capital is in most cases actual cash that needs to be placed somewhere. Generally, the simplest and most transparent model is to consider that the ...