Last week, I explained that investment banks should look for thematic, holistic ways to address regulatory compliance. One of the major themes in today’s regulatory landscape is capital.
Strategies for capital management
If I may focus on Basel III for a moment, banks should begin by modeling counterparty exposure as accurately as possible. Notably, this means calculating advanced credit value adjustment (CVA), whether using regulator-approved models or standardised calculations as specified by local regulators.
If using an internal model, banks need accurate and complete credit mitigation data. This can be challenging, as it requires banks to source and cleanse multiple data sources. However, beyond these initial challenges, banks can achieve an additional competitive advantage in better understanding their counterparty portfolio and capital use. In turn, this can enable management to make more efficient decisions about markets and products.
Join me next week as I share five observations for investment banks in 2013.
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