Strategic Capital: Defining an Effective Real-World View of Capital

REPORT PREVIOUSLY PUBLISHED BY OLIVER WYMAN
December 14, 2012
Industry Trends
Global

Abstract

The advent of the Comprehensive Capital Analysis and Review (CCAR) stress testing process as the dominant regulatory measure of bank capital adequacy in the US has established a new and complex framework for financial institutions to measure and manage risk. Stress testing arguably provides a more realistic view of capital adequacy than previous measures such as economic capital and Basel regulatory capital. However, bank management now faces difficult decisions on how to use stress testing for internal decision-making, whether to move away from economic capital, and how to manage the uncertainty of a Fed-led stress testing standard.

In Strategic Capital: Defining an Effective Real-World View of Capital, Oliver Wyman addresses the questions by proposing that banks take back the lead in advancing risk measurement by developing Strategic Capital, a bank-led view of risk and capital through the stress testing lens.  Strategic Capital can replace many but not all of the traditional uses of economic capital and, most importantly, can be used to drive top-of-the-house economic decisions in a way that aligns with the real-world constraints imposed by the CCAR process.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Development of Capital Requirement Frameworks

2

Failures of the Ancien Régime

3

Enter Stress Testing

4

Where to Next?

6

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