Risk Weighted Assets, Capital Deductions, Balance Sheet, Leverage Exposure, Liquidity & Funding.
At heart these are regulatory based measures, designed to ensure a Financial Institution remains safe and in business. Financial Resource Management covers a wide scope of knowledge and skills. The measures hold a cost for Financial Institutions, both terms of management and opportunity. A significant amount of management time is spent measuring, reporting and making the best use of these metrics. We should also note the time directors spend defending there business’s use of these resources and investors comparisons with other institutions, You can only use regulatory capital once at any point in time, tie it up in lower return activity and you will have underperformance.
Capital Viewpoint Offers
Work undertaken across the resources. RWAs, Capital Deductions, Balance Sheet, Leverage, Funding and Liquidity.
- Business and desk segmentation and client reporting of resource use.
- Preparation of Steering Meeting data – Organise , prepare and run an effective Asset & Liability (ALCO) steering process.
- Strategic review – Is your set-up efficiently using RWA’s, Balance Sheet Leverage and other resources.
- Tactical work to improve RWA use. E.g., Credit Risk, fix broken netting sets and incorrect counterpart weights, educating traders on trade choices.
- Strategic medium term steering of Financial Resources. Seasonal assessment. Multiyear planning.
- Impact assessment and mitigation of regulatory and market change.
A lack of FRM is a godsend for any competitors. Naivety leaves one open to resource arbitrage by others. A nice revenue today in exchange for high resource use for years to come, leaving a business hobbled by the millstone of legacy trades.
A good strategy at the institution level is naturally vital for survival, but proximity to business units and work at a more detailed level is perhaps the key to optimisation. Care should be taken when comparing metrics across business lines. Preparation and accuracy of internal management numbers is not always the same across departments. Comparison is not always enlightening and it should not in anyone’s interest to incentivise resource hoarding. It takes water to grow apples and pears, but one is not necessarily preferable to the other, a world with both is a richer environment. A portfolio of businesses is more robust than one alone. One business’s higher Balance Sheet Leverage can be balanced with another’s heavier use of Risk and RWA’s.
Human factors are also important. There are limits to how many detailed parameters people can reasonably consider whilst still being able to win business. A comprehensive pre-deal approval process can easily achieve 100% success at filtering poor resource returns by ensuring no business at all. A predicament to be avoided. Single deal metrics should not trump long term profitable relationships. No revenue, no business, no point! FRM does though sit at the core of the increased efficiency that banks must drive just to stay in business.
There are many ways to break broad topics down. Here we’ll look at three aspects to the FRM sphere, Governance, Data and Framework
It’s difficult to gain traction without some defined objectives. An intention to do more with less is effectively the direction of the goal, but a strategic description of current resource use and intended use, gives a foundation from which to move forward. A considered path towards the goal. Resource strategy needs to be part of the overall business strategy. Current resource use and forecasts, with the impact of regulatory changes noted, should be one of the key contributors when building a business strategy.
At the centre of periodic steering is the Asset Liability Committee (ALCO), or equivalent management meeting. Through this, business heads can understand their resource use and how it compares to others. Here the path is set and the mandate given to steer for a more optimal direction.
Sales and Traders need to understand the strategy and engage to fulfil it. Communication and education helps to achieve the buy-in.
Data and Framework
There can be plenty of data sources – front office trade systems, risk and finance computations as well as other static and market data. There are benefits to using Front Office raw trade data as well as aggregated risk and finance reporting datasets. A bottom up meets top down approach can get back some of the value of trading book granularity which is often lost in risk and finance aggregations. Better data intelligence opens the ability to steer and optimise. The interaction between business units can also be found. Time series data helps us to understand the effect of different market conditions and evolving trends.
Trade or business models can help us understand single trade theoretical numbers against aggregated portfolios where offsets across trades have been applied. Models also help to forecast for market and regulatory changes. Benchmarks can also be used as hurdles when trying to encourage traders to fully price financial resources. The data should also reveal any patterns in resource use.
The term nature of resource use should also be a focus. Are traders successfully pricing in expected future resource costs.