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  • Writer's pictureJohn Demeritt

The Capital Conundrum

The Capital Conundrum

Capital | Credit

The onset of the pandemic and economic shutdown brought fear to the industry. Credit losses appeared imminent for many financial institutions. However, it became clear through 2020 that extraordinary government intervention would not only prevent the economy from deteriorating further but also result in a faster recovery than many had anticipated. On average, credit conditions improved.

Now the industry is presented with a new set of capital challenges. Fiscal and monetary policy have contributed to tremendous balance sheet growth, earnings pressures, lower capital ratios, increased credit uncertainty, and concentration risk. Capital planning has evolved into one of the most critical risk management practices to help financial institutions understand how various economic environments, and expectations for growth, earnings, and capital distribution, can impact capital buffers and strategic planning. Capital planning and sensitivity testing are helping management teams deal with the greatest risk everyone is talking about: uncertainty.

The following are 5 reasons why capital forecasting is a critical exercise.

1. Capital Initiatives

  • How much capital do we have?

  • How much capital do we need?