The Principles of Banking, 2nd Edition

CHAPTER 16Bank Strategy II: Capital and Funding Management

Abstract

A bank's capital management objectives are: (i) to ensure that the bank maintains an optimal capital level that is in compliance with regulatory requirements, ensures balance sheet robustness over the long term, supports its businesses, and enables strategic growth and investment opportunities; (ii) to ensure a continuous capital position that provides comfort to external stakeholders, includes deposits and intermediaries; (iii) to seek to be efficient in its capital mix, to keep overall cost of capital as low as possible, and to deliver a sustainable target rate of return for shareholders. Hence a bank will actively monitor and manage its capital position over the medium term. This is achieved by setting capital targets for which anticipated regulatory changes and stakeholder expectations are taken into account, forecasting capital demand for material risks based on the bank's risk appetite, as stated in the Board risk appetite statement, and determining the desired capital requirements and reviewing the maturity profile of existing capital instruments.

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;
• funding management policy.

Template capital management ...