The Dodd-Frank Act and Basel III are going to change the way banks raise, allocate and manage capital. Banks need to prepare for these changes now and develop effective strategies for achieving capital optimization and sustainable return on equity. The GFMI, a marcus evans, Capital Adequacy and Strategy Conference, September 12-14, 2012 in New York, NY, will help banks to understand what the legislation means for capital adequacy, as well as what they need to do to achieve the optimum level of capital to ensure continuous profitability.
Not only do US banks have to understand the Basel compliance rules, but they also need to understand how this relates to the Dodd Frank compliance act and how these two regulations work together to build a capital strategy.
Clifton Loo answered a series of questions written by GFMI before the forthcoming Capital Adequacy and Strategy Conference. All responses represent the view of Mr. Loo and not necessarily those of SunTrust Bank.
What do you think of the latest additions/clarifications to the Basel III requirements?
Overall the requirements are consistent with both the CCAR process and also the Dodd Frank Act. Although we agree in concept with the majority of the information, some of the requirements seem to have erred on the overly cautious side causing banks to be at conflict with their basic process of lending. Other items appear to need more thought like the change in the reps and warranties.
How do the regulations really affect capital adequacy on a daily basis?
Risk weights have gone up and there are less capital instruments that can be used to meet our capital requirements and ratios. In addition, depending on how you interpret the rules, some of the buffers may not actually be buffers because of the Prompt Corrective Action that is attached to failing to meet the requirements.
How important is economic capital (EC) at the moment?
EC is still important for risk adjusted pricing, portfolio mix management and risk tolerance/limit setting. However, EC is not important from a capital adequacy or regulatory perspective. Regulators have almost no focus on EC, but there are rumours this will change.
What are the ways (if any) to minimize regulatory capital?
This is a hard question because to minimize regulatory capital, you have to change your product mix as regulatory capital calculations are based on products. This change in product mix may make the bank less profitable or unprofitable. Banks may need to rethink how to measure profitable return from a regulatory perspective.
What do you feel attendees will gain from attending this conference?
I think the regulatory environment has become restrictive and this conference is a forum to discuss how businesses are reacting to the new regulatory environment to keep their businesses profitable. Also, the conference may be a good forum to rethink how EC and regulatory capital are used in the risk adjusted decision making process.
Clifton Loo, PhD currently serves as the Head of Economic Capital at SunTrust Banks. In this capacity, he leads the effort to calculate economic capital along with assisting in the bank-wide calculation of risk adjusted return on capital. In addition, his team builds the econometric models for the CCAR process. In previous positions, he has worked as Portfolio Risk Manager and Operational Risk Manger in SunTrust Robinson Humphrey and also a Model Validation Manager at SunTrust.
For more information please contact Michele Westergaard, Senior Marketing Manager, Media & PR, GFMI at 312-540-3000 ext. 6625 or Michelew@marcusevansch.com.