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Capital management regulatory perspective (guest lecture)

Q: What are the two primary objectives of capital management?

Optimise the capital structure (1. full fill regulatory requirements, 2. satisfy stakeholder expectations 3. determine optimal level of debt financing 4. make optimal corporate finance decisions.) --> leads to an optimal cost of capital Optimise performance (1. translate strategy into capital allocation, 2. optimise economic profit per business line, 3. Evaluate performance per business line, 4. Optimise capital allocation.)--> leads to an optimal return on capital Together these two maximise value.

3 important questions on Capital management regulatory perspective (guest lecture)

What are the four perspectives on capital management?

Regulatory
Risk
Accounting
Corporate Finance

What are the two primary objectives of capital management?

Optimise the capital structure (1. full fill regulatory requirements, 2. satisfy stakeholder expectations 3. determine optimal level of debt financing 4. make optimal corporate finance decisions.) --> leads to an optimal cost of capital
Optimise performance (1. translate strategy into capital allocation, 2. optimise economic profit per business line, 3. Evaluate performance per business line, 4. Optimise capital allocation.)--> leads to an optimal return on capital

Together these two maximise value.

Regulation with respect to available capital is built on four tests

performance ( can the bank rely on the capital component, what is the maturity?)
loss absorption ( can the principal absorb losses in going concern?)
subordination (how subordinated is the claim, can principal absorb losses in gone concern)
pay-out discretion ( does the issuing institution have discretion over pay-outs related to the capital component)