Bangkok--Dec 15--PRIMEZONE MEDIA NETWORK
Despite significant momentum behind the use of economic capital within the financial services sector, a new study by PricewaterhouseCoopers, in association with the Economist Intelligence Unit, has found that may institutions are failing to realize the full potential of risk-based capital management as a business tool to enhance their strategic and tactical planning and optimize shareholder wealth.
The study, entitled ‘Effective capital management: Economic capital as an industry standard?,’ sought views from more than 200 senior financial services executives globally and revealed that 44% of companies already use economic capital with a further 13% planning to do so within the next 12 months. However, a quarter of companies (25%) said that they have no intention of adopting economic capital at all and a third of non-adopters are skeptical about the value of economic capital itself.
Economic capital and other advanced risk-based capital methodologies enable financial institutions to quantify the risk-adjusted returns that are being made.
The main business reasons cited by survey respondents for the uptake of economic capital are to improve their strategic planning, define their appetite for risk and set their risk limits. Ninety-five percent of companies have or expect to achieve a better allocation of capital using economic capital than under a regulatory capital model.
Yet, inn practice many institutions are not exploiting the full business value of economic capital. The study found:
--Levels of understanding among senior management about the business applications of economic capital very greatly between institutions. Responsibility for managing economic capital still rests predominately with the risk management function rather than with the business units.
--Levels of understanding among senior management about the business applications of economic capital vary greatly between institutions. Responsibility for managing economic capital still rests predominately with the risk management function rather than with the business units.
--Risk-adjusted performance measures are only infreguently being used to drive compensation for senior managers and business unit heads, and risk and financial reporting often remain separate.
--The results of economic capital calculations are disseminated patchily within the organisation.
Phil Rivett, partner, PricewaterhouseCoopers, said:
“Economic capital is fast gaining ground within financial services companies globally. In the right hands economic capital is a powerful management toll which can provide a better understanding of the trade-off between risk and reward, leading to more incisive decision- making and more sustainable value creation. However, the evidence from our study suggests that too few senior managers are making the leap.”
The study also highlighted that more than one third of companies (36%) do not report economic capital results externally to shareholders and other key stakeholders.
Banks are more active in disclosing economic capital than insurers or other financial services companies. Around 70% of the world’s top 50 banks disclose usage of economic capital to their shareholders via their annual report and 50% disclose economic capital results by business units both in their annual report and quarterly financial results (a).
Richard Barfiedld, director, PricewaterhouseCoopers, said:
“Companies are generally not exploiting the full business value of economic capital as it is some times seen primarily as an internal tool and not always communicated to institutional investors and other external stakeholders. This could be why investors are regarded by respondents as being the least knowledgeable on the issue of economic capital.
“It will take time for economic capital to become a true industry standard so that shareholders and analysts can realistically compare one institution with another. Each step towards risk-based management of capital not only strengthens the ability of financial companies to make a reasonable return for their shareholders but also strengthens risk management.”
Key regional findings include:
-The U.S. has the least plans to introduce economic capital – with 37% of U.S. financial institutions saying that they have no plans compared to only 19% for Asia-Pacific and 27% for Europe.
-The main reason for adoption economic capital in the U.S. is to define risk appetite, cited by 79%. For both Europe and Asia-Pacific the mean reason is to improve strategic planning at 67% and 68% respectively. The U.S. at 44% is the region least likely to report economic capital figures externally, compared to Europe, the lowest at 34%. The U.S. and Europe are most likely to report in the future, both at 40%.
-Regulators in Asia-Pacific are least likely to reguire economic capital (12% compared to 42% in the U.S.), but it is also the region that says while economic capital may not be reguired it is expected (55% of companies in Asia-Pacific compred to only 15% of companies in the U.S.).
Notes to Editor
1.‘Effective capital management: Economic capital as an industry standard?’ is available to download at www.pwc.com/financialservies. To obtain a hard copy, please contact Vanessa Burgin on 020 7212 1002 or Vanessa. [email protected]
2.The financial services group of PricewaterhouseCoopers has developed a global programme of briefings to address key strategic issues facing the industry with the emphasis on drawing conclusions about best practice and future trends. Other briefings in the series include:
--Offshoring
--Growth
--Improving Preformance
--Risk management
--Governance
--Rebuilding public trust
--International Financial Reporting Standards
--Compliance
--Restructuring
--Wealth management
3.PricewaterhouseCoopers (www.pwc.com/uk) provides industry-focused assurance, tax and advisory services for public and private clients. More than 130,000 people in 148 countries connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders.
Unless otherwise indicated, PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP a lomited liability partnership incorporated in England. PricewaterhouseCoopers LLP is a member firm of PricewaterhouseCoopers International Limited.
(a)Economic Capital Disclosures at Top 50 World Banks, PricewaterhouseCoopers analysis 2005
The PricewaterhouseCoopers logo can be found at: http://www.primezone.com/newsroom/prs/?pkgid=2126
PricewaterhouseCoopers
Mike Ascolese
+1 646-471-8106
Porter Novelli for PricewaterhouseCoopers
Kate Alexander
+1 212-601-8286
[email protected]. End
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