Incorporating economic and regulatory capital to increase efficiency and optimisation of allocation

Incorporating economic and regulatory capital to increase efficiency and optimisation of allocation

By Steve Byron, Risk Director, Capital & Risk Appetite, Lloyds Banking Group

Steve, can you please tell the Risk Insights readers a little bit about yourself, your experiences and what your current professional focus is?

I am a Risk Director with Lloyds Banking Group with responsibility for Capital and Risk Appetite.  I am the Accountable Executive for our Capital regulation compliance programme and my professional focus is on the efficacy of our regulatory capital management.  I have worked in the industry for over 30 years with the last 20 in risk and capital roles.

What elements would you expect to see in a fully implemented system?

There is no “one size fits all solution” the key is that you have systems and capability that are appropriate for the scale and the balance sheet risks that your business runs.  In general the bigger the balance sheet the more developed I would expect systems and capability to be, however I am not a fan of overly complex yet perhaps technically sound approaches, simplicity is the key in my book.  If the Senior Executive and business do not understand, and by that I mean they can explain the capital determination & allocation processes, then they are not fit for purpose irrespective of how technically elegant they may be.

At the Risk EMEA Summit, you will be speaking on your insight regarding ‘Incorporating economic and regulatory capital to increase efficiency and optimisation of allocation’. Why is this a key concern right now? And what are the essential things to remember?

I think the value of economic capital models is diminishing as regulatory capital is the binding constraint.  I think a focus on economic profit provides a valuable insight into a business that complements the more traditional P & L analysis.

Please can you describe why it is important to use models to their full potential?

Economic capital models provide the potential to measure the true value of new business opportunities, improve portfolio risk management and better understand sensitivities to the wider economic environment

What are the key considerations for an institution with limited resources?

The key consideration is what to invest in to drive the greatest value for their organization.  I say if resources are constrained keep it simple, build on the regulatory framework and work hard to drive some sensible assumptions to measure performance.

How do you see the risk landscape industry evolving over the next 6-12 months?

The regulatory onslaught shows no signs of abating, CRR changes, EDA model definition changes, PRA mortgage model guidance and of course Basel 4.  The regulatory agenda looks set to dominate for a number of years.