Rethinking Capital Management

The choice between the standardized approach and an internal ratings-based model for capital management should only be made after careful consideration is given to the needs of a diverse group of shareholders.

Challenged by heightened geopolitical risk and spurred by the pending finalization of Basel III, EU banks should reconsider their capital optimization. While there are many factors to consider, the choice between the standardized approach or internal ratings-based (IRB) models for credit risk will heavily influence capital strategy.

Geopolitical risks, of course, are reshaping the world – whether we’re talking about ongoing wars between Russia/Ukraine and Israel/Hamas, the recent military conflict between Iran and Israel and the United States, AI-driven government espionage, or terrorist-led attacks on commercial shipping vessels in the Red Sea. The fallout from these events impacts everything from market risk and credit risk to operational resilience. Indeed, they have as resulted in jittery financial markets, as reflected in extremely high values of the VIX/Uncertainty index in April this year.

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