Regulatory Capital

Since the Financial Crisis, banks have been under intense scrutiny from many angles, in particular from their regulators. The regulators’ goal has been to change the way banks underwrite loans ensuring the origination of stronger credit quality risk in order to avoid a repeat of the US subprime crisis. In addition, regulators have sought to safeguard balance sheets by having banks hold the appropriate amount of capital against the loans created.

Global regulations (captured in Basel III and IV frameworks) and local regulatory requirements all point to the necessity of banks to stand on a stronger footing (i.e. better capitalised) and be better prepared for stress periods. At the same time, regulators are conscious not to deter banks from their intermediating function within the real economy (providing loans to stimulate economic activity).

The tightening of the regulatory environment continues today, with banks continuously needing to keep adapting to this landscape and monitor their capital performance ratios.

Besides purely regulatory capital requirements, there are additional implications from changing accounting rules such as International Financial Reporting Standards 9 (IFRS9) and Current Expected Credit Loss (CECL) on banks’ balance sheets. At the same time, banks are also confronted with changing economic circumstances impacting top line revenues, profitability and returns.

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